As the Federal Reserve prepares to adjust monetary policy, the multifamily and rental markets are poised to play a crucial role in shaping interest rate expectations. According to Matt Vance, senior director and economist at CBRE, multifamily housing accounts for 34% of “headline inflation” and 43% of core inflation, making it a significant factor in the Fed’s decision-making process. Vance spoke at the Commercial Economic Issues & Trends Forum on November 15 during NAR NXT: The REALTOR® Experience in Anaheim, California.
Vance, alongside NAR Chief Economist Lawrence Yun, expressed a consensus that the Federal Reserve is likely to begin cutting the federal funds rate in 2024, contingent upon government data reflecting a slowdown in rent growth. Vance noted that while the Bureau of Labor Statistics reported a peak in rent growth in March 2023, the reality indicated that the peak occurred in the first quarter of the previous year. This discrepancy has led to ongoing expectations for a decline in core inflation, which excludes volatile food and energy prices and is closely monitored by the Fed.
Forecasting Rate Cuts
CBRE’s projections suggest that the Federal Reserve will implement three rate cuts in 2024, with the first potentially occurring in March. However, there is a possibility of only two cuts, which may take place in May or June, depending on how the economic data evolves.
Despite a slowdown in rent growth, the multifamily sector remains the preferred asset class among real estate investors, having recently surpassed industrial and logistics properties in popularity. Vance highlighted the most active multifamily markets, including Los Angeles, Boston, Phoenix, Dallas-Fort Worth, Austin, Nashville, Atlanta, Miami, Charlotte, and Raleigh-Durham.
Investor Dynamics and Cap Rates
The rise in capitalization (cap) rates is presenting challenges for investors, with rates increasing approximately 155 basis points since the first quarter of 2022. However, there are still embedded gains for property owners who acquired assets prior to 2017. Vance noted that some investors are willing to accept negative leverage, especially for properties selling at 20% to 40% below replacement cost, as these assets cannot be reproduced at current prices. Many investors believe they will realize significant returns over a five- to seven-year holding period.
Looking ahead, Vance anticipates a gradual “return to mean” for cap rates over the next two years. He indicated that for major markets like Dallas-Fort Worth and Boston, cap rates may have peaked for core and core-plus properties, while older vintage properties may still have further adjustments to make.
The insights shared at the NAR NXT forum underscore the multifamily sector’s vital role in the broader economic landscape and its influence on interest rate trends as the Federal Reserve navigates the complexities of inflation and economic growth.
Related Topics:
