NMHC: What Rising Interest Rates Mean for Apartment Cap Rates

 

In a new research newsletter, the National Multifamily Housing Council concludes that the effect of rising interest rates in the coming year will depend, in part, on just how much the Federal Reserve decides to raise short-term rates, as well as how long-term rates respond. 

"Interest rate hikes that are too aggressive could put a damper on economic growth prospects, which would have an adverse impact on property values and upward effect on cap rates. Cap rates could also potentially face upward pressure in markets with diminished rent growth projections, as we have seen in the San Francisco and New York City markets over the past five years.

"Still, apartment cap rates are fundamentally a real rate of return that should only be affected by changes to the real rate of interest. Apartments, given the short-term nature of their leases, are uniquely positioned to simply re-price their rents during inflationary periods in order to offset higher nominal interest rates. Even though the 10-year Treasury has already inched upward, the apartment market continues to benefit from historically high occupancy rates and rent growth, causing cap rates to further decrease.

"Furthermore, with apartment transaction volume at record levels, investors may simply be willing accept a lower premium for holding apartment properties. This multitude of factors helps explain the weak historical relationship between nominal interest rates and apartment cap rates."

Read the full newsletter here.