Rising Interest Rates for Apartment Building Owners Will Equate to More Expensive Leases for Renters

Source: WSJ, article link here.

Article Summary Below:

Investors have spent $63 billion on apartment buildings from 2019 to 2021, the highest figure on record. Prices paid for apartment buildings increased 22.4% from the first quarter of last year to the first quarter of this year. But with this, interest rates have quickly risen this year as well. This caused some multifamily return rates to fall a percentage point or more below the interest rate on their mortgages, thus creating negative leverage.

Few expect a wave of defaults from investors today as they are less indebted than those in 2008. Apartment buildings are also continued to be looked at as relatively stable assets through the eyes of asset managers. Apartment investors believe they can survive a period of lower returns because the increasing rents can push up their returns over time. But it is an uncertain bet as some tenants are already beginning to struggle with rent. The median asking rent for an apartment unit in April this year was up 17% from the previous year coming out to $1,827.

Outstanding mortgage debt backed by multifamily buildings has more than doubled to $1.8 trillion since the financial crisis. Mortgage rates have risen to 4.5% on some multifamily deals which may cause apartment owners to be under pressure. Rising rental growth is inevitable but the question is if it will outpace the interest rates.



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