Rising Cost of Capital Squeezing Multifamily Cap Rates

According to a new analysis from Moody’s Analytics, that will ultimately pressure property values in the sector — and “without continued unprecedented rent growth, the darling multifamily asset class likely carries the most risk of value decline while the benchmark US Treasury rate is on the rise,” analysts say.

“Although Q3 has finally started to show a slight increase for industrial, office, and retail, cap rates have remained sticky. For multifamily, cap rates have continued to decline, which, along with tremendous rent growth, has propped up multifamily values compared to equities and other investments,” Moody’s Kevin Fagan and Xiaodi Li write. “But the increasing cost of capital and mounting concerns about ex-ante exit cap rates will ultimately drive buyers’ bids lower and property yields higher for the multifamily sector. So, multifamily property values will face pressure from both the Fed pushing rates and banks following suit with loan interest rates.”

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Mortgage rates dropped again, so why are some borrowers on the sidelines?

The 30-year fixed-rate mortgage declined three basis points from last week to 6.41%

“Following generally higher mortgage rates throughout the course of 2022, the recent swing in buyers’ favor is welcome and could save the buyer of a median-priced home listing more than $100 per month relative to what they would have paid when rates were above 7% just two weeks ago,” Danielle Hale, chief economist at Realtor.com, said in a statement.  

Hale added that with mortgage rates averaging nearly three times higher than in a typical year, many potential shoppers have pulled back.

“A long-term housing shortage is keeping home prices high, even as the number of homes on the market for sale has increased, and buyers and sellers may find it more challenging to align expectations on price,” Hale said. “A cooling rental market, in which rent growth is moving back toward historical norms, may offer hesitant home buyers a refuge from which to regroup and perhaps reevaluate their plans in the new year.”

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How 'Forever Renters' Are Changing Real Estate As We Know It

The cost of a home is at an all-time high in the United States. According to the National Association of REALTORS®, the median home price increased by 15% from last year.

But how exactly is this housing market impacting millennials and Gen-Z? Millennials are currently the largest generation in terms of population size in the country. The median age of a homebuyer was 45 this year, compared to 31 in 1981. As homebuyers get older and older, other milestones, such as having kids, getting married and retiring, also end up getting pushed back.

Millions of Americans are wondering if they’ll be forever renters. In fact, “18% of millennial renters say they plan to rent forever” (up from 11% in 2018), according to research from Apartment List. This is excellent news if you’re a real estate investor, but not so much if you’re the average American trying to buy a home. Forever renting could lead to a massive shift in the housing market for investors. It is very possible that the earning potential for real estate investors will only increase year over year.

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