Rising Interest Rates Are Squeezing Apartment Investors, With Rents Set to Rise
Investors snatched up apartment buildings in record numbers throughout the pandemic. At the same time, rents continued to rise, providing the type of cash flow that supported such purchases and their debt financing.
Now, there’s concern that many of those same investments are overleveraged. First, prices have gotten so high returns have diminished, and second, rising interest rates have squeezed profit margins given higher mortgage payments. Notably, this sort of negative leverage was widespread in 2008 when the subprime mortgage crisis played itself out. Some analysts argue the current real-estate market is rife with many of the same mistakes.
The Mortgage Bankers Association says outstanding mortgage debt backed by multifamily buildings has more than doubled over the past 10 years, all while rents have continued to rise. The steadfast belief rents would remain on that upward trek likely gave investors confidence that in the long term, rising rent rolls would eventually mean higher returns.
Now, there’s some data suggesting rents are nearing their peak, in terms of what tenants can afford. Realtor.com says the median asking rent for any rental unit in April was 17% higher than in 2021. At $1,827 it’s the highest median asking rent on record.
Despite the fact many tenants are being stretched thin, overleveraged property owners may still increase rents. As interest rates rise, owners may feel pressure to charge higher rents and offset that increase.
In this sense, analysts explain it’s not a question of if rents will rise, but by how much. In some cases, mortgage rates on apartment buildings exceed 4.5% as the Fed enacts a more hawkish monetary policy and looks to slow inflation. Both property owners and tenants may be tightening their belts while that process plays out.
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