Multifamily investors are bracing for a spike in mortgage rates and other forms of home financing as the Federal Reserve hikes interest rates in 2022. As a measure to combat inflation, the Fed is planning three hikes of 25 basis points each. And in December, the Fed announced that it would end its bond-buying program by March.
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But mortgage bankers and economists agree that the rise in the cost of capital will be modest and will not dampen the availability of financing or the surge in investment. Multifamily lending is set to rise 3 percent this year to $421 billion as the economy continues to recover Association of Mortgage Banks projects.
“The change in interest rates is not expected to reduce demand for apartment buildings this year. Much of the demand is being driven by real estate values and fundamentals, both of which are extremely strong right now,” said Jamie Woodwell, vice president of commercial real estate research at MBA. He added that high real estate yields and low vacancy rates are driving valuations higher.
Another key factor is the nationwide housing shortage. Construction will increase this year by 5 percent to almost 500,000 units, reports Robert Dietz, chief economist at the National Association of Builders. “Demand is particularly strong in growing Southern cities like Austin, Nashville and Phoenix as urbanites move from high-price markets to less densely populated areas,” he noted.
All things considered, multifamily rental growth is unlikely to repeat the performance of 2021, when rents rose 13.5 percent year-on-year through November Yardi Matrix. However, lenders will make deals against a backdrop of a market with solid – if less sensational – potential. For 2022, CBRE forecasts rent increases of 6.5 percent and continued low vacancy rates in both urban and suburban markets.
ripple effect
 100vw, 400px”/>August 2021. Source: Mortgage Bankers Association</p> <p>Now mortgage bankers are assessing the impact of the Fed’s actions in the coming months. Forecasts of how much the average 30-year fixed-rate mortgage (currently at 3.05 percent) will rise in 2022 vary. Some bankers are predicting a 25 to 30 basis point rise. Fannie Mae, for example, expects the average 30-year fixed rate to be 3.3 percent by the end of the year. In contrast, MBA forecasts a 4 percent increase.</p> <p>But student and senior housing in particular could gain more if the Omicron variant blocks recovery in those sectors. Any lockdown could hurt near-term prospects for these sectors, observers say. Affordable housing, which is extremely attractive to banks and government-sponsored companies, is likely to receive the most aggressive interest rates this year.</p> <p>That’s largely because Freddie Mac and Fannie Mae are on a mission to help alleviate the housing crisis and have an incentive to offer the best terms for those deals. Each agency increased its multifamily loan ceiling to $78 billion by 2022. Banks also receive a community reinvestment loan for arranging packages.</p> <p>A $107 million credit facility arranged by Fannie Mae <strong>PGIM real estate</strong> Last fall for a national affordable housing operator is an example of this trend. The transaction funded nine properties that will offer more than 1,200 affordable units in Colorado, New Mexico and Texas.</p> <p>It was structured as a 30-year fixed-rate loan that the operator will use to repay existing debt and provide capital for expansion. PGIM Real Estate’s client hopes to increase the credit facility by $100 million over the next three to five years to pay for the real estate purchase.</p> <h2>Fixed or floating?</h2> <p><strong> </strong>While mortgage rates are unlikely to rise this year, there will be a spillover effect on the home finance market.</p> <p>“The general expectation is that interest rate increases will affect short-term and adjustable-rate financing most directly and have less of an impact on the cost of longer-term fixed-rate mortgages,” MBA’s Woodwell said.</p> <p>Floating rate lending is likely to rise to 75 basis points above the federal funds rate, predicts Michael McRoberts, chair of agency lending at PGIM Real Estate. “That will lead to a churn of investors into fixed income finance in 2022,” he said. As a result, investors must balance the upfront flexibility of an adjustable-rate structure against the cost, he adds.</p> <p>The choice between fixed-rate and adjustable-rate loans depends on the borrower’s investment strategy and circumstances, said Gregg Gerken, Executive Vice President & Head of Commercial Real Estate at <strong>TD bank</strong>.</p> <p>“If an investor plans to sell the asset in the short-term, they can opt for an adjustable rate loan and put a cap like an interest rate hedge on it to take advantage of the current low interest rates with some upside protection going forward. ” he said. That’s a good approach for a buyer planning a three to five-year holding period for a property that isn’t fully leased yet, Gerken added.</p> <p>In addition, there are several trade-offs to consider. “It all depends on the type of asset you’re funding and your investment plans,” noted Jeff Wilcox, one of the directors at <strong>portal</strong>. “If you’re a generational owner, a fixed-income product with interest rate hedging might make sense.”</p> <p>One trend that experts say may be emerging is that more investors are opting for shorter fixed-rate maturities of five to seven years for acquisition loans, rather than three-year floating-rate bridging loans.</p> <h2>Cap Rate Trends</h2> <p>Another concern is whether rising interest rates will affect cap rates, and if so, by how much. “We don’t think rising interest rates will have any impact at all,” said Matt Vance, head of multifamily research for the Americas at CBRE, noting that cap rates and bond yields don’t necessarily move in tandem.</p> <p>“Considering the amount of capital that is targeting this real estate sector, there is sufficient spread between the cap rate and the bond yield to allow for slight further compression in cap rates, as we have seen in 2021,” as the Interest rates fell by about 10 basis points.</p> <p>An encouraging sign is that rising rates are unlikely to have a material impact on key loan or interest reserves. “Over the past 18 months, many non-bank lenders have been lending above LTV because rent rates are rising so rapidly and the overall debt service ratio is improving,” Gerken noted.</p> <p>As an example of pure interest rate trends, PGIM cites a $44.5 million loan on a Georgia property. With a spread of 258 basis points over the SOFR, the 10-year Freddie Mac financing starts with five years with no interest. “We were able to get a good margin because it’s a 100 percent mission deal,” noted Lee McNeer, executive director of agency originations at PGIM Real Estate.</p> <p>Read the February 2022 issue of MHN.</p> <br> <br> source <a href=)
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