Multifamily Building

Rising Rates and Multifamily Investments in NYC

With the Federal Reserve’s recent 25 basis point increase to the federal funds rate, and its intention to raise rates twice more in 2018, commercial real estate investors face questions on how best to approach rate resets and loan maturities. Here’s what multifamily investors should be thinking about today.
Kurt Stuart, Head of the Northeast, Commercial Term Lending
June 28, 2018
This article first appeared in GlobeSt.

The Federal Reserve’s interest rate normalization process continued in June with the Federal Open Market Committee’s (FOMC) announcement that it raised the federal funds rate by 25 basis points, to a target range of 1.75 percent to 2.0 percent. This is the second rate hike in 2018 and the seventh since normalization began in December 2015. As normalization progresses, multifamily investors should consider how a higher rate environment might affect their portfolios, and perhaps more importantly, determine the proactive steps they can take to best position them for the future.

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Economic Strength Supporting Continued Normalization

Since the first 2018 rate increase in March, economic data has been largely in step with the Fed’s outlook. In May, the national unemployment rate fell to an 18-year low of 3.8 percent, and the four-week rolling average for weekly jobless claims fell to 216,000, which is the lowest the average has been since December 1969.

In New York City specifically, the seasonally-adjusted unemployment rate in May was just 4.2 percent, a 0.4 percentage point decrease from a year earlier. This comes alongside the city’s private sector growth rate of 2.1 percent, which is greater than the state-wide rate of 1.4 percent and the national rate of 1.9 percent. And in March, the US Bureau of Labor Statistics reported that the New York metropolitan area saw a 2.8 percent increase in total compensation costs for private sector employees.

Nationwide, the tighter labor market has not fueled a commensurate amount of wage growth, but inflation is closer to the Fed’s long-term inflation target of 2 percent than it has been since the beginning of the recovery. The Fed has indicated that being slightly over its inflation target is no more alarming than being slightly under, which should help calm concerns that it will accelerate interest rate hikes if inflation exceeds the target. Rate hikes in 2018 and beyond should remain gradual—despite somewhat hawkish comments coming out of the Fed’s June meeting—with the FOMC’s statements indicating it now expects two additional increases in 2018 and three or four hikes in 2019.

J.P. Morgan Markets Interest Rate Forecast

Hover over sections of the graph to show additional information. Click on a category to show or hide its data.

This chart shows J.P. Morgan Markets’ interest rate forecast for Q3 2018, Q4 2018, Q1 2019 and Q2 2019; for 3-Month Libor the forecasts are: 2.6%, 2.9%, 3.1% and 3.35%; for the 3-Year Treasury the forecasts are: 3%, 3.15%, 3.25% and 3.3%; for the 5-Year Treasury the forecasts are: 3.1%, 3.2%, 3.3% and 3.35%; for the 7-Year Treasury the forecasts are: 3.25%, 3.3%, 3.35% and 3.4%; for the 10-Year Treasury the forecasts are: 3.25%, 3.3%, 3.35% and 3.4%; for the 30-Year Treasury the forecasts are: 3.35%, 3.35%, 3.4% and 3.45%.
 

Source: J.P. Morgan Markets, as of June 22, 2018

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Preparing Your Balance Sheet for Rate Hikes

If economic growth continues to accelerate and the economy moves closer to operating at its full potential, the Fed’s rate normalization is likely to proceed. As such, investors should prepare for a higher interest rate environment and structure their portfolios to withstand rate increases. When considering an investment, we encourage clients to think 200 to 300 basis points higher.

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Looking Ahead to Rising Rates and Maturing Loans

Investors can prepare by taking action to protect their portfolios from unforeseen challenges down the line. During the financial crisis, investors who were faced with maturing loans—when interest rates were higher, valuations were lower and liquidity was below normal levels—found themselves in situations that were not ideal.

For commercial real estate investors, we believe it is important to consider where rates may be in one year, two years and even 10 years. Taking into account this longer term view, we encourage our clients to review their maturity and rollover dates with a strategic and proactive mindset.

No one knows what the future will hold, but investors can take steps to position themselves for success in any market environment. Our recommendation continues to be to structure their businesses and their balance sheets so that they are well positioned to capitalize on opportunities, irrespective of where we are in the real estate cycle.

 

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Credit is subject to approval. Rates and programs are subject to change; certain restrictions apply. Terms and conditions subject to commitment letter. Products and services provided by JPMorgan Chase Bank, N.A #1 claim based on 2017 FDIC data.

© 2018 2018 JPMorgan Chase & Co. All rights reserved. Chase is a marketing name for certain businesses of JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A., Member FDIC. The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein by Kurt Stuart, are solely those of Kurt Stuart and do not reflect the views of and opinions of JPMorgan Chase & Co. or its affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase & Co. research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.
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