NMHC Panel Jan27

NMHC Panel

Before the presidential election, the consensus economic forecast was more of the same slow-growth environment that has prevailed since the Great Recession ended. However, the election of Donald Trump changed expectations for domestic output, prompting interest rates to rise. Yardi Matrix vice president Jeff Adler and CBRE Americas head of research Jeanette Rice spoke to these changes and more during the Apartment Markets: The Macro Perspective panel at the National Multifamily Housing Council’s recent Apartment Strategies Outlook Conference. The panelists discussed what rising interest rates could mean for an interest-rate sensitive asset class such as commercial real estate. Adler asserted that the impact will be determined by how much and how fast rates increase and property performance. A prolonged period of rising rates could diminish property valuations, but at the same time a modest decline in values caused by a one-time bump in rates could be offset with revenue increases. Although it will take some time before the true impacts can be fully gauged, if interest rates are an indication, then economic productivity and inflation could rise in the coming years. The panelists deliberated upon what happens to cap rates as interest rates and (by extension) property values move higher. Adler believes that Cap rates are likely to moderately rise and valuations may take a slight hit as interest rates increase, however the key factors will be the pace of rate increases and the concurrent revenue growth. He shared a model that Yardi Matrix® created to predict the impact of both interest rate and revenue increases and determined that mild and steady interest rate increases can be significantly offset by healthy revenue growth, and as a result valuations should remain stable. Looking at an internal rate of return (IRR) calculation, an increase in interest...