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High mortgage rates don’t just affect homeowners. The higher rates are making it more difficult for apartment owners to pay back their loans, and they may be forced to raise their rents—even higher—to generate more income to do so, The Wall Street Journal reports.
Apartment building sales have been breaking records ever since the pandemic as investors have been drawn to the surging demand for apartments and are betting that rents will continue to rise. From 2019 to 2021, the annual volume of rental-apartment purchases nearly doubled, according to CBRE Group Inc. data.
But owner profits are coming under pressure. Investors have been purchasing apartment buildings at escalating prices, and their return rates are shrinking. Prices paid for apartment buildings increased 22.4% in the first quarter compared to a year earlier, according to MSCI Real Assets data. Coupled with that, interest rates have risen quickly and that has meant property owners are making less money on their buildings and many are now entering into what’s known in the industry as “negative leverage.”
Tenants are already feeling the impact of higher rents. So how much more can owners raise rents to make up the difference? After all, the median asking rent for a rental unit was at a record high of $1,827 in April, according to realtor.com®. That is nearly a 17% increase from a year ago.
“Owners who paid steep prices for apartment buildings could be at risk if rent growth slows, while rising interest rates threaten to push down building values and make it harder to refinance mortgages,” The Wall Street Journal reports. “Even a wave of minor distress could have far-reaching consequences for the financial sector because of the sheer amount of money that is now tied up in the rental-apartment sector.” The Mortgage Bankers Association reports that outstanding mortgage debt backed by multifamily buildings is more than double since the financial crisis—at $1.8 trillion.