The Federal Reserve announced yesterday, August 27th, that they intend to allow inflation to remain above the 2% target rate for a while now in order to compensate for lower than targeted inflation achieved over the past few years.
What does this mean as a cash flow investor, specifically in multifamily? It means that lending rates will be kept lower for a few more years. If you’ve been attuned to the markets, this isn’t necessarily news, but what it does do is keep cap rates in markets with solid fundamentals in place. The common discussion I’ve heard over the past month is that prices are going to loosen across most markets due to the nation’s pandemic. The fed’s signaling has now given multifamily owners firm reason to hold their ground on pricing, just as long as their collections don’t falter.
From the buy side, as the stock market continues to act decoupled from reality, the role of owning cash flowing assets becomes even more vital to produce a stable yield. The trend I’ve come to see is that cash flowing assets will continue to become more desirable not just for the yield, but for the hedge.
An investment hedge, according to Investopedia, is “an investment to reduce the risk of adverse price movements in an asset.” In laymen terms, it’s parking your money somewhere that is not as volatile as to reduce the risk of losing that investment capital.
For those looking to hedge money, lots of people have been turning to physical gold and bitcoin since the pandemic struck in Q1 of 2020, and the Fed began ramping up the money printing machines. Those are certainly solid bets in my opinion. I also allocated funds to each of those strategies. But my money is still on cash flowing real estate.
Gold and Bitcoin, both good assets with potential price appreciation as a hedge, do not provide any cash flow. They can increase and decrease in value, similar to real estate, but they do not have the tax advantages that real estate does, they do not provide for a basic human need, and they do not, most importantly, provide cash flow.
What I see in the future of the asset class is investor money pouring into real estate as simply protection, with an upside of a yield, rather than being a yield driven investment option, which has the feature of security. Today’s US Treasury 10 Yr Bond Yield is .74%. Many Class B multifamily assets through private offerings today are 6-7%, often offered as a preferred rate, and then often offered with an equity feature underneath that to bolster overall returns. Even if the equity were to be flat in 5 years, you’re still over 10X better on the rate of return in half the investment duration of a 10 Year Bond.
From the sale side, I expect deal pricing to remain as strong as their pre-pandemic numbers. Sellers in stable markets with the right amenities and locations will continue to perform. When it does come time to sell, you can expect these properties to fetch the premium they deserve, because they are a proven commodity that can provide security, yield and tax benefits.
The returns mentioned above from private offerings will create even stronger demand for safety and yield. Combine that with the Fed’s intentions to keep rates low, and asset prices stable, expect cap rates to stay firm, and even compress in the strongest of markets.
