The Interest Rate Conundrum
A common question I have been asked by some of you is “With interest rates rising, do you think prices are going to come down this year?”
In my opinion, the likely answer is no. I expect the valuations of multifamily assets to continue to increase in 2022. This seems counterintuitive because higher interest rates mean buyers are able to pay less in order to meet their target returns, However, there are several factors counteracting the interest rate effect:
- 2021 rent growth was record breaking with rents growing on average in the double digits in several MSAs including Hampton Roads, where we hold an asset. 2022 rent growth is expected to remain strong and prove in real-time that multifamily is an inflation hedge. Higher rents means higher income and higher income means a higher valuation
- This is the final year that investors can take 100% bonus depreciation. I believe there will be strong investor appetite to take advantage of this program while it lasts as folks look for ways to offset taxes.
- Although I expect interest rates to rise, I believe the ceiling rates can hit in the short and medium term is lower than what many expect. The reason why is that, given all the debt our government has created, only so much of the federal budget can go toward interest payments – actual programs need to be funded
- The bridge lending market is continuing to stay hot. Many investors have been able to make deals pencil by taking on short term floating rate interest only debt with the idea of generating a higher cash on cash return while the debt is in place and refinancing within 1-5 years
- Investors continue to pile into multifamily, especially those who previously invested in retail and office. The greater the demand, the higher the price.
Finally, I am excited to announce that Ryan Voccia is joining the Sixth Sense Equity team as our Head of Investor Relations. Ryan is based in Delray Beach, Florida and is an investor in Delray Townhomes, the most recent deal we did in December. I’ve known Ryan for a couple years and have found him to have a great perspective on multifamily, markets, deals and the economy. You can say hi to Ryan at ryan@sixthsenseequity.com