Investors who have raised home construction prices to record levels over the past year are beginning to be under pressure as sharp rises in interest rates put pressure on profits.
High borrowing rates make it difficult for apartment landlords to repay their loans. It can also be bad news for tenants if it encourages building owners to raise rents higher than they would otherwise, as it is their primary tool for generating more income. There is sex.
Apartment sales have been strong for many years, but set a new record as rents surged to record levels during a pandemic. The price of apartments has risen even more rapidly as investors expect rents to continue to rise.
Annual volume of Buying a rental apartment According to, it almost doubled between 2019 and 2021
CBRE Group Ltd.
In the first quarter of 2022, investors spent $ 63 billion on building an apartment. This is the highest number ever.
Recently, two things have happened that make future profits more difficult. Investors have begun to buy apartments at prices that have risen so rapidly that return rates are declining. According to MSCI Real Assets, prices paid for apartment buildings rose 22.4% year-on-year in the first quarter of this year.
Since then, interest rates have skyrocketed this year, with some multi-family initial return rates falling more than 1 percent below mortgage rates, according to commercial real estate brokers and investors. Imbalances mean that landlords make less money in buildings than banks, even though they carry far more risks.
Known in the industry as negative leverage, this phenomenon has not been so widespread since the subprime crisis, when apartment construction debt defaults surged.
Nitin Sheksal, CEO of real estate investment manager Palladius Capital Management, said some investors suffered when buyers paid high on buildings and financial markets froze 2008. I’m worried that I haven’t learned the lessons since before the year.
“You see a lot of the same mistakes,” he said.
Few people expect a wave of defaults that resembles the subprime crisis. Investors’ debt is low today, and rental condominiums can continue to appeal to large pension funds and asset managers as relatively stable assets, supporting prices.
In addition, many apartment investors expect rents to continue to grow at a fast pace and boost earnings over time, so they believe they can survive periods of low earnings.
Given that there are many people, it’s an uncertain bet Tenants are already pinched.. According to Realtor.com, the average asking rent for rental units in April rose to $ 1,827. This is the highest rent ever and is up almost 17% from the previous year.
The owner of The Wall Street Journal operates Realtor.com under license from the National Association of Real Estate Agents.
Slow rent growth can put high-paying condominium owners at risk, and rising interest rates can devalue buildings and make it difficult to refinance mortgages. Even the slightest wave of pain can have widespread consequences for the financial sector due to the enormous amount of money currently being held in the rental apartment sector.
According to the Mortgage Banking Association, unpaid mortgage debt backed by multi-family housing has more than doubled to $ 1.8 trillion since the financial crisis.
Investors typically calculate the profitability of a building by dividing the profit of the property before the mortgage is paid by the purchase price. Theoretically, the so-called capitalization rate should be higher than the mortgage rate. This is because investors are at higher risk than mortgage lenders who are initially repaid in the event of a default.
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Even if the building has been refurbished and mostly rented, it is becoming less and less. In fact, according to CBRE, these rates of return have been steadily declining since 2015.
To stay ahead, these investors need rental income to rise. “You are basically running to catch up with your debt,” Sheksal said. The problem, he said, is that the recent rise in mortgage rates means investors need to run even faster.
According to David Brickman, CEO of real estate firm NewPoint RealEstate Capital and former head of home finance firm Freddie, rising interest rates faster than rent can reduce the value of a building when a mortgage expires, putting pressure on owners. There is sex. Mac.
He said investors regularly buy apartments with a low capitalization rate of 3.5%.
However, as the Federal Reserve strengthens monetary policy to combat inflation, mortgage rates on some of these transactions are now above 4.5%. He doesn’t expect a wave of defaults, but Brickman said lenders to apartment owners may be under stress.
“There is no doubt that rents will go up. The question is whether it will exceed interest rates,” he said.
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