Multifamily Plays a Big Role in Taming Interest Rates

The multifamily/rental market makes up 34% of “headline inflation” and 43% of core inflation. So, the sector is “paramount to building any expectation of what Fed will do,” said Matt Vance, senior director and senior economist for CBRE, speaking at the Commercial Economic Issues & Trends Forum Nov. 15 at NAR NXT, The REALTOR® Experience, in Anaheim, Calif.

Vance shared the stage with NAR Chief Economist Lawrence Yun, and the two agreed that the Federal Reserve will begin cutting the federal funds rate in 2024—once government data catches up with the reality of slowing rent growth. “The [Bureau of Labor Statistics] says rent growth peaked in March of this year,” Vance said. “The reality was a peak in the first quarter of last year. So, we've been expecting core inflation to come down for some time.”

Core inflation, which excludes food and energy costs, is the number the Fed watches to determine whether inflation remains an issue.  The charts compare consumer price index inflation overall with core CPI inflation. The black line is CBRE’s analysis of how inflation would look if the BLS were using real-time data.

Vance said at the session that CBRE was forecasting three rate cuts in 2024 with the first coming in March—and a downside scenario of only two cuts with the first coming in May or June.

Despite flagging rent growth, multifamily remains the most-favored asset of real estate investors and recently overtook industrial and logistics, Vance said.

The hottest multifamily markets? Vance pointed to Los Angeles, Boston, Phoenix, Dallas–Fort Worth, Austin, Nashville, Atlanta, Miami, Charlotte and Raleigh/Durham.

Rising cap rates are eroding value for investors. By the third quarter of this year, cap rates were up about 155 basis points from Q1 2022. But there are embedded gains for some owners who purchased before 2017, and Vance said there are still buyers aggressive enough to take on negative leverage. “For assets selling at 20% to 40% below replacement cost, you can't build them at that price today. [Investors] feel they'll come out ahead on a five- to seven-year hold.”

Vance forecast a steady “return to mean” for cap rates over the next two years. “For Dallas–Fort Worth, Boston and other hot markets, it’s very possible cap rates are at their peak for core and core-plus properties,” he said. “Older vintage properties have further to go.”