The Fed just raised interest rates for the first time in 1,148 days. What does that actually mean for multifamily investors?
In this episode, I break down what the Fed’s latest rate hike means for multifamily real estate and why investors should be paying attention to more than just the Fed funds rate. I explain the difference between the Fed funds rate, SOFR, and the 10 year Treasury, and why the 10 year Treasury is especially important when it comes to commercial real estate debt.
I also break down how higher interest rates have affected multifamily valuations, why buildings that traded at aggressive prices in 2021 and 2022 are now selling at significant discounts, and the relationship between interest rates and cap rates. We look at why cap rates can lag changes in interest rates and how rent growth, financing costs, and investor expectations all influence property values.
Timestamp
00:00 Intro, the Fed's first rate hike in over three years
02:16 The Fed funds rate explained
02:51 What is SOFR?
03:29 How the 10 year Treasury works
04:29 Why Treasuries matter to commercial real estate
09:25 Why floating rate debt created distress
12:47 How cap rates affect property values
14:40 Why cap rates and interest rates aren't directly correlated, and where that falls apart
16:10 The impact of rent growth on cap rates
17:38 What experts are saying about rates and the market
20:08 Where interest rates could go next
23:25 How Apogee Capital is underwriting deals in today's rate environment
26:37 The one idea to take away from all of this
What I Cover
- What actually happened when the Fed raised rates for the first time in over three years
- The difference between the Fed funds rate, SOFR, and the 10 year treasury
- How interest rates affect multifamily debt and property values
- Why low interest rates drove multifamily valuations higher
- How floating rate debt contributed to today's distress
- The relationship between interest rates and cap rates
- Why cap rates lag changes in interest rates
- How rent growth affects property valuations
- Why today's market may create opportunities for disciplined buyers
- How Apogee Capital underwrites multifamily deals in a higher rate environment
- Why positive leverage and conservative assumptions are critical
Key Takeaways
- The Fed only directly controls the Fed funds rate, the 10-year Treasury is set by the bond market based on inflation expectations and risk
- Floating rate bridge loans are priced off SOFR, which moves in near lockstep with the Fed funds rate
- Cap rates and interest rates are not directly correlated, but they are tied together through cost of capital, a lag effect, and rent growth expectations
- A property can lose 40 percent or more of its value when cap rates rise even if nothing about the actual asset changes
- The best buying opportunities in real estate history often happen during high rate periods because that's when competition disappears
Resources
- Join my Multifamily Advisory Conference: https://www.eventbrite.com/e/multifamily-advisory-conference-tickets-1998949811697
- Mentorship Program
1:1 coaching for active multifamily investors.
https://apogeemfc.mykajabi.com/mentorship - Mastermind Program
For serious multifamily investors building their skills, network, and relationships.
https://apogeemfc.mykajabi.com/mastermind
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Connect With Me
🌍 Website: https://www.apogeemfc.com/
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