Higher Rates Could Keep Renters Renting and Apartments Trading
Marcus & Millichap says higher rates are extending renter tenure as apartment fundamentals improve
The Federal Reserve initiated a rate hike in September. As of Oct. 8, the 30-year fixed-rate mortgage stood at 7.4%, up from 6.3% a year ago.
Higher mortgage rates are making homeownership increasingly difficult, as if it wasn’t already. A recent Marcus & Millichap brief said that the numbers could end up “further reducing purchasing power and reinforcing the lock-in effect among homeowners with lower-rate loans.”
For multifamily owners and operators, “stronger retention should support apartment performance, though tighter financial conditions could still limit rent growth by slowing hiring and household formation,” the brief said.
On the positive side, there’s evidence of increased rent tenure. The share of renters renewing their leases reached 57.6% in September, more than 5 percentage points above the 2015-2019 average.
However, in addition to potentially putting the squeeze on household formation, the financial environment is pressuring “a residential construction pipeline that has already contracted,” according to the brief.
The seasonally adjusted number of residential permits in August remained more than 25% below its early 2022 monthly peak. Construction of homes and apartments, already facing high labor and materials costs, could slow further.
Higher borrowing costs are adding another obstacle, as homebuilders working toward affordability by offering sales incentives through mortgage rate buy-downs, closing-cost assistance and even reduced pricing.
For multifamily investors, the more consequential issue could be debt.
Higher interest rates are reducing acquisition leverage and refinancing proceeds, potentially widening the gap between what apartment owners want for their properties and what buyers can justify. Borrowers with loans maturing over the next year may have to inject additional equity or sell when they refinance.
But improving property operations could help close that gap.
“Improving operations could partially offset these financing pressures, however, as slowing construction, declining concession use, and a ninth consecutive month of effective rent growth in August point to stronger property-level cash flow,” the brief said.
“These trends could strengthen confidence in future income, creating a path for better buyer-seller alignment and increased transaction activity,” according to the brief.
While higher rates are generating headaches in the single-family housing market, they’re reinforcing the basic proposition that people stay renters for longer as homeownership becomes more costly.
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