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Treasury Yields and Interest Rates Cast Shadow on Multifamily Hopes

Since 2022, many in the multifamily industry (and other parts of CRE) have told GlobeSt.com that they expect “next year” to be when markets straighten out. When interest rates fell enough; when bid-ask spreads contracted; when deals got done; when price discovery came back.

Those predictions never came entirely true. Maybe not even close. A discussion with lender NewPoint Real Estate Capital’s Marty Fayer, senior managing director on the company’s originations team, suggested that conditions going into 2025 are leading to another year of the same.

Fayer thinks that “2025 felt great until rates started moving up, the 5-, 7-, and 10-year Treasury, and the likelihood of SOFR rate cuts ameliorating. It’s a little bit of a question market in terms of what 2025 will look like in terms of refinances and acquisition financing.”

Yields on the longer-term Treasurys are out of the direct control of the Federal Reserve and as they represent the best proxy for the risk-free portion of interest rates, higher numbers mean higher mortgage rates that have a big effect on multifamily refinancing and new financing.

The impact comes down to 60% to 70% of the multifamily capital stack being debt. “There’s no shortage of capital for debt or equity,” Fayer told GlobeSt.com. Typically, a buyer needs the cap rate to be higher than the debt rate or the property is unlikely to generate enough net operating income to afford the debt service. The seller wants a lower cap rate to make more money.

“If the 10-year comes down to 4% and stays there, it will be a good year,” says Fayer. “If the 10-year stays where it is today — 4.5 or 4.75 — it’s going to be an anemic year. A lot of people can’t sell above a certain cap rate number.”

In addition to Treasury yields, an unnerving factor is volatility, and the nearly hundred basis points have allowed them to move within six months. “Whenever something moves that much, it feels like the earth is moving underneath you,” Fayer says. “It’s hard to have certainty when two-thirds of your capital is uncertain.”

“The story of all the distress that’s going to be out there in the multifamily space hasn’t manifested,” he added “It kind of feels like last year and the year before. Everyone has very little convection about what the year is going to look like, either on the debtor side or on the value side. I think you have just a very moderately optimistic outlook.”

When asked whether it is optimistic or wishful thinking, Fayer says, “I think people are wishful because everyone wants to be busy. Deals have to transact for people to realize profits. You need transaction volume and uncertainty means less transaction volume, which leads to people being hopeful that they have more transactional volume.”

To move from hopeful to realistic, buyers and sellers will again have to find a meeting point. That isn’t looking likely at the moment. “The bid-ask spread is widening,” Fayer says. “I had felt like it was shrinking, but no more.”

Reprinted with permission from the Friday, 24 January 2025 07:04:28 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.