The yield on the 10-year Treasury has been so low for so long that you can excuse borrowers for being lulled into complacency.
For the past 18 months, multifamily borrowers have seen some of the lowest fixed rates in history, giddily locking in long-term rates that begin with a 4. And floating rate borrowers are all smiles as well—the one-month LIBOR has been less than 36 basis points (bps) since May 2009.
But how long can this dynamic last?
“What goes down must come up,” quips David Brickman, who leads the multifamily division for McLean, Va.-based Freddie Mac. “Nobody could’ve guessed how steeply rates would fall, and you have to run that in reverse. Just when everybody believes we’re in for a long run, that’s when things get shaken up.”
The government-sponsored enterprises (GSEs) have been the multifamily industry’s stimulus plan, and the resulting competitive landscape, combined with the Federal Reserve’s Quantitative Easing program, means that these low rates will continue in the near term.
“It’s a very artificial situation and one that the Fed has explicitly said they’re going to continue for some period of time,” says Ryan Krauch, principal at Los Angeles-based lender Mesa West Capital. “There’s a very good chance that the Treasury and LIBOR remain low for years, until the Fed starts seeing some significant and sustained economic recovery.”
Then again, it could all turn on a dime. There’s such significant central bank influence on rates that policy decisions and public statements—even a few words in the FOMC statement—could move the market faster than lightning. But most likely, things will stay relatively stable at least until Election Day.
“I’m betting Bernanke keeps rates low; it’s an election year, too, and that comes into play,” says Mark Beisler, chairman and CEO of Columbus, Ohio-based Red Mortgage Capital. “Inflation hasn’t reared its ugly head—the bigger concern has been deflation. But if you’re a variable-rate borrower, you’re sitting pretty right now and for at least another year.”
It’s a distinct window of opportunity for borrowers, a balancing act. Every apartment owner is hoping for job growth—that’s what fills units, after all—but with too much growth comes inflation. Still, “too much growth” isn’t exactly in the forecasts.
“I think the economy will continue to be rather choppy, and I don’t see any real pressure on interest rates,” says Bill Hughes, managing director of Encino, Calif.-based Marcus & Millichap Capital Corp. “Every time there’s a hiccup in Europe, money comes dumping in to the U.S. Treasury. I don’t really see anything too much that’s going to either raise the cost of debt and equity or change the capital availability into the marketplace.”