Is Multifamily a Safe Haven Amid Rising Interest Rates?

As the world economy navigates the challenges posed by rising interest rates, multifamily housing has emerged as an increasingly popular choice for investors and renters alike. This article delves into the reasons behind the heightened demand for multifamily housing in such an environment. CRED iQ’s research team dug into the data to see if sentiments have evolved. 

When examining different metropolitan statistical area (MSA) tiers, we’ve noticed that Fannie Mae (FNMA) originations have remained relatively stable since 2019. Despite the Federal Reserve’s more aggressive stance to combat inflation since the first quarter of 2021, the multifamily sector continues to show resilience. This suggests that its performance is influenced more by the dynamics of supply and demand rather than interest rates alone.

In the primary markets, when we examine the past 36 months, we observe a significant decrease in multifamily issuance in Dallas-Fort Worth, Philadelphia and San Diego. Secondary markets such as the San Bernadino, Calif., market have experienced a significant downward trajectory since 2020, while tertiary markets have demonstrated resilience over the past 36 months, with certain MSAs like Palm Bay and Sarasota, Fla., showing modest increases.

The New York MSA has experienced a significant decline in multifamily issuance. In 2019, this MSA saw $5.3 billion of Fannie Mae issuance, but, in 2022, due to market changes, Fannie Mae issued only $2.9 billion. This represents a substantial 45 percent decrease in issuance over that period.

On a loan-by-loan basis, it is evident that there has been a consistent increase in Fannie Mae loan note rates, corresponding to the substantial rise in the Secured Overnight Financing Rate (SOFR) over recent years. In 2020, the average loan original note rate was 3.08 percent, while SOFR averaged 21 basis points. In the current market, we’ve observed a direct impact on loan original note rates, which now average 5.7 percent, with the 30-day average SOFR rate at 4.38 percent as stated by the Federal Reserve Bank of New York.

Upon closer examination of loan-level data, we observe that variables like debt service coverage ratio (DSCR) and loan original note rates continue to experience stress when compared to today’s loan originations.

Despite changing economic conditions, multifamily properties are considered a stable asset class. Here are some compelling attributes of multifamily real estate.

• Stable income streams

In a rising interest rate environment, investors often seek assets that provide stable income streams to offset the potential decline in the value of their bonds and other investments. Multifamily housing, such as apartment buildings and complexes, offers exactly that. Rental income remains consistent and often increases over time, making it an attractive choice for investors looking for a secure source of cash flow.

• Diversification benefits

As interest rates rise, investors tend to seek asset classes that are less correlated with interest rate movements. Multifamily housing investments can provide an effective diversification tool for portfolios dominated by stocks and bonds. The value of multifamily properties is driven more by supply and demand dynamics and local market conditions than by interest rates, making them a valuable hedge against market volatility.

• Resilience in economic downturns

The demand for multifamily housing remains relatively consistent even during economic downturns. In times of economic uncertainty, people often opt for renting over homeownership as it offers greater flexibility. This characteristic makes multi-
family housing an appealing investment choice in a rising interest rate environment, where concerns about the economy may lead to reduced consumer confidence in purchasing real estate.