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The Federal Reserve has continued tightening monetary policy, most recently increasing the Fed Funds rate by 75 basis points. This rate-hike represents the largest Fed Funds rate increase since 1994—a tactic the Federal Reserve is using to try to cool inflation’s current 40-year-high of 8.6%. As a result, financial advisors and investors alike turn to investment strategies designed to attempt to build and protect wealth. To learn the impact of rising interest rates on Multifamily Real Estate, we must look at the potential influence of rate increases from different perspectives.

Loans

Multifamily property owners may need to refinance debt as existing loans come due. In a rising interest rate environment, potential debt considerations include higher fixed-rate loans, or more complex instruments like interest rate swaps or caps. Regardless, higher debt service requirements can squeeze cash flow, but Multifamily Real Estate fundamentals have remained strong. For example, the continuous housing shortage has created persistent Multifamily demand as more people are priced out of homeownership and are required to rent.

Rent growth is also expected to continue its positive trend from last year. In its 2022 Multifamily Outlook report, CBRE forecasted a 7% growth in net effective rents for the Multifamily sector this year.

Cap Rates

An increase in interest rates could bring down cap rates for Multifamily property owners, potentially signaling for investors to seek traditional Fixed Income. Bond yields, however, don’t always move in sync with Multifamily property cap rates, which is why CBRE remains bullish on the sector’s chances to shrug off any potential impact of rising interest rates.

“We don’t believe rising interest rates will have any impact at all. Considering the amount of capital targeting this real estate sector, there is sufficient spread between the cap rate and bond yield to allow for modest continued compression in cap rates as we saw in 2021 when rates declined about ten basis points.”

- Matt Vance, Americas Head of Multifamily Research at CBRE, January 26, 2022

Returns

Some industry analysts might argue rising interest rates may even positively affect Commercial Real Estate performance. For example, as represented by the FTSE Nareit All Equity REIT Index, REIT returns were positive during 84% of rising rate periods from Q1 1993 to Q2 2021.

REIT Annual Returns Q193 to Q221@2xSource: www.reit.com

To echo our previous point: Real Estate valuations have the potential to be somewhat insulated from rate increases if demand manages to remain strong in 2022.

“The change in interest rates is not expected to reduce demand for multifamily housing this year. A lot of demand is driven by property values and fundamentals, both of which are extremely strong right now.” - Jamie Woodwell, Mortgage Banker Association VP of commercial real estate research. - multihousingnews.com 

Cause for Confidence

Multifamily investors and property owners are wise to watch how higher interest rates could impact Multifamily investing. But as we’ve discussed, several factors suggest Multifamily Real Estate may be well-positioned to continue the strong growth it has exhibited since the early days of the pandemic. 

If you’d like to learn more about the multifamily investment option, download our FREE eBook, A Potential Inflation Hedge for Today: Private Multifamily Real Estate. You can also conveniently schedule a one-on-one meeting with me HERE.

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Topics: Insights, Multifamily

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The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by the issuer, or any affiliate, or partner thereof ("Issuer"). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to any “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified. Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.

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Real Estate Risk Disclosure | 1031 Risk Disclosure

• There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
• Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
• Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
• Potential for foreclosure – All financed real estate investments have potential for foreclosure; 
• Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
•Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
• Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
• Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.

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