Three Key Issues Facing Multifamily in Q4

As the multifamily real estate market enters the final months of 2024, I am keeping an eye on several factors that will influence the sector. These include the upcoming presidential election, the Federal Reserve’s interest rate strategies, and the lingering effects of hurricanes Helene and Milton. Each will affect market dynamics, presenting potential challenges and opportunities.

The 2024 election introduces policy choices that could impact the multifamily real estate sector. Vice President Kamala Harris’ platform emphasizes increasing housing supply through incentives for affordable housing, which could boost development in key areas facing housing shortages. Former president Donald Trump’s proposals to extend tax cuts and reduce regulatory hurdles aim to maintain a favorable environment for real estate investors. His stance on deregulation, especially in construction and housing, could reduce costs and streamline project timelines, benefiting developers and investors alike.

Harris Policy Proposals

Affordable housing initiatives: Harris’ platform emphasizes affordable housing development, proposing tax incentives and a $40 billion fund to create 3 million new housing units, potentially boosting supply in high-demand areas. While these incentives may benefit development, implementation challenges remain. Zoning adjustments, another component of her plan, face potential hurdles, as zoning authority is typically managed at the local level. Investors may see limited impact if local governments resist federal zoning changes.

Environmental standards for new developments: My assumption is that Harris would continue to support the Biden administration’s green initiatives that promote energy efficiency and climate resilience in new building developments, particularly federally supported multifamily housing. This would potentially lower long-term operating costs. However, the initial costs of meeting these standards could deter new developments if the upfront expenses outweigh the benefits.

Proposed tax changes: Harris’ tax policy includes adjusting the corporate tax rate and revisiting 1031 exchanges. While these measures are intended to increase federal revenue, they may also push developers toward long-term investment in affordable housing by limiting short-term gains on property sales. Increasing the corporate tax rate and limiting 1031 exchanges could impact investment liquidity and discourage reinvestment in multifamily projects. This could result in fewer transactions, potentially dampening market activity.

Harris supports extending the 2017 tax cuts for households earning under $400,000 but would allow them to expire for wealthier individuals, aiming to maintain fiscal responsibility through additional revenue measures on high-income earners and large corporations. Critics argue her plan could reduce long-term GDP growth and employment due to its impact on corporate and capital gains taxes.

Trump Policy Proposals

Tax reduction and 1031 exchange preservation: Trump’s commitment to preserving and potentially extending the 2017 Tax Cuts and Jobs Act, including the 1031 exchange provision, may foster continued liquidity in the multifamily market. By allowing investors to defer taxes on gains, this policy encourages reinvestment, which can stimulate multifamily development. Critics argue that lower tax rates disproportionately benefit high-income investors rather than addressing broader housing affordability issues and could increase the national deficit if not offset elsewhere.

Tariff proposals: Trump’s “America First” trade policies aim to bolster domestic industries through tariffs, particularly on Chinese imports. These tariffs could escalate construction and renovation costs by driving up prices for building materials, possibly leading to higher interest rates and financing costs for multifamily projects.

Trump advisors suggest that limited tariffs in 2018 and 2019 had minimal inflationary effects, and that the threat of high tariffs might be used strategically without full implementation, potentially reducing inflation risks. Additionally, deregulation in sectors such as energy could counteract inflation by lowering production costs. However, retaliatory tariffs could disrupt supply chains and elevate development costs.

Deregulation: Trump’s efforts in deregulation focus on cutting costs and accelerating development timelines through simplified permitting processes. While federal deregulation could reduce costs for construction materials, its impact might be limited to the local level where many development regulations are enforced.

Immigration: Proposed changes to immigration policy, such as deporting immigrant workers, could shrink the labor pool, increasing wages and prices, or cutting into business margins. Advocates for these policies argue they could result in higher wages for American workers.

Impact of Fed Rate Cuts on Interest Rate

A study by CBRE Econometric Advisors reveals that multifamily cap rates are sensitive to interest rates but not perfectly aligned. The analysis, spanning data since 1995, reveals that for every 100-basis-point shift in the 10-year Treasury yield, cap rates for multifamily assets have moved an average of 75 basis points.

While Fed rate cuts may temporarily reduce borrowing costs, they don’t guarantee lower long-term rates or cap rates for stabilized properties. This was evident after the Fed’s September rate cuts, when long-term rates remained largely unchanged.

Long-term interest rates are influenced by a range of economic factors, including inflation expectations, economic growth, government debt supply, global demand and anticipated Federal Reserve actions. These rates are shaped by broader economic forces rather than just short-term Fed policy.

Even if long-term interest rates do not decline substantially, multifamily cap rates can stay stable or even compress due to strong asset demand, allowing investors to accept lower cap rates based on anticipated rent growth.

Hurricanes and Market Disruptions

Recent hurricanes have raised questions about their impact on housing markets, particularly in affected regions such as Florida. Rising insurance costs and home prices might lead residents to reconsider living in high-risk coastal areas. These events underscore the need for thorough geographic risk assessments in investment strategies. Coastal properties face rising insurance premiums that could affect operating margins and overall market affordability. Inland areas might see stable or increased demand, while coastal growth could slow due to perceived risks. Some may opt to rent for greater flexibility amidst uncertain long-term climate impacts.

As these multifaceted influences unfold, we are re-evaluating future investments, particularly in hurricane-prone areas, and will continue to monitor emerging trends closely.