Learn how your multifamily investments may be affected, both now and in the future
On July 31, 2019, the United States Federal Reserve announced it was cutting interest rates by a quarter point. This was the first interest rate cut since 2008, when the country was heading into the Great Recession.
Why did the Fed cut rates?
Reducing rates is a way to brace against “downside risks,” to support the economy and to boost inflation, Federal Reserve chairman Jerome Powell said at the news conference announcing the cut.
The Fed voted to reduce its benchmark lending rate by 25 basis points from between 2.25% and 2.5% to between 2% and 2.25%. This mid-cycle adjustment comes after four rate hikes in 2018. Financial experts are predicting there may be a second rate cut later in the year[1].
What does this mean for the multifamily market?
This move was far from unexpected, as the Fed had been remarking for several weeks beforehand that a rate cut was likely. The interest rate cut is also relatively small, so there isn’t predicted to be a huge change in the commercial real estate market.
Regardless, the rate cut is excellent news for multifamily investors as their cost of capital just decreased! While it’s unlikely to boost multifamily asset prices, there are other opportunities to be had.
In combination with the strong local economy, population growth and low unemployment, the cut creates more chances for multifamily investors to find restructuring and refinancing opportunities. If you’re looking to refinance your asset, you’ll most likely find that you’re able to do so at a potentially lower rate.
Even the recent yield curve inversion shouldn’t be a cause for concern, as the U.S. economy remains relatively healthy—especially compared to foreign markets—according to experts at the Mortgage Bankers Association[2]. Occurring when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds, an inverted yield curve can signal that an economic downturn is on the way.
However, commercial real estate is often viewed as relatively immune to economic uncertainty, and current conditions may actually serve to garner additional interest from international investors.
What’s next for the multifamily market?
While many CRE experts view an interest rate cut as a positive thing, it’s smart to remain cautious. Add to this the recent yield curve inversion and you have a lot to pay attention to as a multifamily investor.
One thing’s for certain — we’ll be keeping a close eye on the real estate market to see how things unfold. For up-to-date market news, the 100Units.com blog is your resource for all things multifamily.
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