We’ve been fielding a lot of questions from our clients about where we see the market going and what factors they need to be thinking about, from emerging opportunities impacting the multifamily asset class to a new administration. To help shed some light on the changing dynamics of today’s marketplace, I recently sat down with REIS Chief Economist Victor Calanog to discuss New York City’s multifamily outlook.
Here are a few of the main highlights from our discussion:
Pro-Growth Environment and Rising Interest Rates
The new administration’s economic agenda includes some key components that are expected to drive growth. Consider things like investments in infrastructure or tax reform: The expectation is that they will drive economic growth, and inflation will likely follow that growth. Inflation is good for asset prices—but the flip side is it will likely result in higher interest rates.
In March, the Federal Open Market Committee (FOMC) moved to increase its overnight borrowing rate by 25 basis points. It’s widely anticipated that it will raise rates again at its June 14 meeting, bringing the federal funds rate to a range of 1 percent to 1.25 percent. The Fed is expected to raise rates three times this year with the third hike potentially coming at its September meeting—moving closer to its long-term goal of 3 percent.
A higher-interest-rate environment might have some multifamily investors worried—but ultimately, if the FOMC moves to raise rates, it should instill confidence in investors. For one, if you look at interest rates over the past 20 years, 1.25 percent sits on the very low end of the spectrum. It’s also worth noting that the Fed has been artificially holding down interest rates since the 2008 recession in an attempt to spur growth and investment in the private sector. Until recently, the Fed has been very cautious about raising rates—and it has only done so when it has been confident that the economy is on strong enough footing to withstand it. When the broader economy is growing—with higher wages and strong job growth—multifamily investors can in turn command higher values and rents.
The Commercial Real Estate Cycle
Commercial real estate cycles can go much longer than a normal economic cycle. It’s important to be strategic about how you’re investing—and while it is prudent to plan for the downside, you also want to be well positioned to take advantage of opportunities that will benefit your bottom line in the long run.
How do you do that? Make sure you understand the fundamental sources of demand. In other words, if you’re investing in rentals, values may go up and down, but consider this: What kind of income can you expect from the assets that you’re planning to invest in? Can that income grow over time? And will the underlying demographics actually support your view?
Especially for multifamily, you want to look at population growth, household formation and whether people are moving away. In New York City, none of these factors are really a concern—in fact they’re all positive indicators for multifamily investors here.
Why New York City Gets the Last Word
Beyond the subjective commentary—“New York City will always be the best because of what an amazing city it is”—there’s a solid argument to be made about why it’s so attractive to investors: supply versus demand. Manhattan is restricted to 28 square miles—so at this point, you can build vertically or rezone areas, which creates a cap on the supply growth you can have.
On the whole, demand to live in New York City should remain strong, and rents and values should stay high.
Chad Tredway is a co-head of J.P. Morgan’s real estate banking business.