Dive brief:
- The 10-year U.S. Treasury yield, a key measure for sizing multifamily loans, it reached 4.874% last weekits highest mark since 2007.
- At the end of August, data firm MSCI said apartment cap rates stood at 5.1%. That leaves roughly 30 basis points between the current 10-year Treasury, making it difficult to get deals done.
- Although the The Federal Reserve halted rate hikes last month, the Treasury has continued to rise. After the central bank’s announcement, it rose 15 basis points. Because the job market remains strong, as it shows the latest government jobs report showing openings of 9.6 million – appetite for more increases could continue to grow.
Dive brief:
Apartment investors look at the spread between 10-year Treasury rates and caps as they underwrite deals. In 2021, when transaction volume was at record highs, this spread was close to 360 basis points.
However, as the Treasury has increased, cap rates have not grown at proportional rates. In April 2023, peak rates stood at 4.8%, while the 10-year Treasury was at 3.46%. Earlier this year, MSCI said the difference of more than 130 basis points left “less meat on the bone for apartment investors.”
Since then, the spreads have only narrowed. Part of the problem isn’t just the current 10-year rate, but the speed at which it has risen and its impact on investor sentiment, according to Rich Ortiz, co-managing partner of the commercial real estate investment management firm based in in New York City. Hudson Realty Capital.
“In the second quarter of this year, many predictions expected the 10-year to float back up to 4% or maybe 3.75%,” Ortiz said. “Clearly, we’re a long way from that. I think you’re seeing a little bit of a market that’s frozen by those statistics right now.”
Ortiz believes the 10-year increase is having a bigger impact on construction financing than existing asset swaps. As lenders look to size new loans using the current Treasury rate, they are seeing big jumps compared to a couple of years ago, forcing developers to pull back.
“What you’re starting to have is just people lending projects,” Ortiz said. “You’re starting to see a lot less construction demand.”
As construction slows, the sales market remains stagnant volume fell 74% in August, continuing a months-long trend of steep declines, according to MSCI. For things to change, buyers and sellers must reach a consensus on prices, which requires stability in borrowing costs.
“The market is not necessarily looking for increases or decreases, but some level of stability,” Jon Siegel, chief investment officer at RailField Partners, an apartment owner in Bethesda, Maryland, told Multifamily Dive. “At the end of the day, you have to be able to figure out what your cost is going to be, and the uncertainty is what really keeps most people on the sidelines.”
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