The Federal Reserve announced Wednesday an interest rate increase of 50 basis points, resulting in a target range of between 0.75% and 1.00%. The move is the largest single interest rate hike since May 2000.
The central bank ruled out a larger increase of 75 basis points in the future, but another 50-basis-point jump — or even two — could be in store. The Fed will next meet on June 14 and 15.
The committee also plans to begin reducing its balance sheet, which jumped up by trillions of dollars during the pandemic as it purchased Treasury and mortgage-backed securities. This process will begin in June, when it will begin selling up to $47.5 billion per month through August before doubling the sell-off cap to a monthly $95 billion.
In the immediate term, multifamily investors will see borrowing costs rise — and with additional increases on the table, this may only be the beginning. At the same time, the increase in rates will mitigate some — though likely not all — of the cap rate compression in the property sector.
Not all multifamily properties will feel the same impact, however. Gateway markets that have faced slowing rent growth, from San Francisco to Manhattan, could see cap rates increase — or at least slide downward at a slower pace. However, markets with strong projected growth, particularly those in the Sun Belt, will likely see cap rates compress even further, owing to unparalleled housing demand amid demographic trends.
Beyond loans and cap rates, interest rates could have additional knock-on effects for developers. With borrowing costs also increasing for construction material suppliers, these costs will be passed on to those building new housing in some form.