How the Fed’s Latest Rate Cuts Could Impact Multifamily Investments and Apartment Development

The Federal Reserve’s 50 basis point rate cut is the first significant reduction since 2020. This move is seen as a step toward creating a "soft landing," controlling inflation and preventing economic disruptions. But what does this mean for multifamily real estate investors and developers?

Immediate Impact on Multifamily Investors

For multifamily investors, the rate cut brings both opportunities and challenges. Lower interest rates reduce borrowing costs, making it cheaper to finance projects, particularly in value-add and core-plus properties where improvements are needed. However, as Doug Ressler from Yardi Matrix noted, cap rates don’t adjust immediately—they often take 6 to 9 months to reflect lower borrowing costs. 

This creates a window of opportunity for investors to take advantage of higher cap rates and reduced financing costs, potentially locking in better yields before cap rates compress in response to falling interest rates. However, timing is everything in this rapidly evolving market.

Cap Rates and Development Costs

According to MSCI, national apartment cap rates have leveled off around 5%, with Class A properties in prime locations even compressing into the low 4%’s. However, while the rate cut may offer some relief, multifamily developers still face challenges like rising construction and labor costs. As Eric Brody from ANAX Real Estate Partners pointed out, one rate cut won’t significantly change the market dynamics. Multiple cuts are necessary to make a long-term impact.

Developers may remain cautious until more clarity emerges on future rate cuts and election outcomes. Paul Waterloo from Interra Realty notes that while transaction volume is up by 46%, the average deal size has decreased by 20%, suggesting that even though activity is rising, investors are still hesitant to make large commitments.

The Forecast for 2024 and Beyond

The Fed’s projections indicate further rate cuts throughout 2024 and 2025, with the federal funds rate expected to drop to 4.4% by the end of 2024 and 3.4% by 2025. This gradual easing should benefit the multifamily sector, making it easier to finance deals and sparking more investment activity.

Greg Fedorinchik from NexMetro Communities believes that further rate reductions could create more favorable conditions for developers. However, if cuts remain below expectations, the market may continue to hesitate, with developers waiting to see how the broader economy reacts.

Refinancing and Debt Management

One of the more immediate effects of the rate cut is its impact on refinancing. Many multifamily properties were financed at lower rates in 2021, and with rising borrowing costs, some property owners have struggled to maintain positive cash flow. A reduction in rates offers relief to those needing to refinance soon. 

As Pierre Debbas from Romer Debbas, LLP, notes, the large amounts of maturing debt in 2025 mean that lower rates will be critical for refinancing. A 25 basis point cut may not be enough for some borrowers, so larger rate reductions are expected to bring significant relief.

The Misconception About Rate Cuts and Long-Term Mortgages

One common misunderstanding is that the Federal Reserve’s rate cut directly affects long-term fixed-rate mortgage rates on a 1:1 basis. However, fixed-rate mortgages are more closely tied to the 10-year Treasury bond yields than the fed funds rate. As the Fed raises or lowers rates, short-term loans are impacted more directly, while long-term rates depend on broader market expectations.

The 10-year Treasury yield, which moves independently of the fed funds rate, is what determines 30-year fixed mortgage rates. So, while the Fed’s rate cuts help lower borrowing costs, long-term fixed-rate mortgage rates don’t always follow suit immediately or to the same degree.

What’s Next for Multifamily and Apartment Development?

While the recent rate cut is welcome news for the multifamily sector, its full impact will take time to materialize. Investors should remain cautious about the long-term effects, as rates alone won’t solve every challenge facing the market. As Lisa Flicker from Jackson Lucas noted, the market sentiment is optimistic but wary. If rate cuts fall below expectations, developers could remain on the sidelines, waiting for further clarity.

In summary, the Fed’s latest move offers multifamily investors a chance to capitalize on lower borrowing costs and potentially higher yields in the near term. However, the full impact of these changes will take time to unfold. For those willing to act early, there are significant opportunities ahead.