Possible Rate Hikes Aren’t Why You’re Not Doing Deals

Interest rates were supposed to be lower by now—they’re not. Because of rising inflation, the market expects short-term rates to increase. What a difference a year makes. The chart below from Eastdil Secured Savills clearly shows how short-term expectations have shifted. They’re almost mirror images of one another: a year ago the market was projecting a handful of rate cuts; now it’s projecting hikes. Both were projected to settle a bit higher in the longer term anyway.

The current assessment from FedWatch at the CME shows the market is predicting as many as two rate hikes over the next 12 months: 

At the same time, the well-regarded Peter Linneman predicts two rate cuts later in the year. His interview on the Walker Webcast in early July came before the latest issues with Iran, so perhaps he’ll change his mind in a subsequent one. The prediction markets certainly disagree with him. The betting site Kalshi puts the odds of two rate cuts in 2026 at just 1.9%, and one cut at 12.7%. While small, there’s still a chance… 

The Fed held rates steady at the last meeting, though three members voted for an increase. New Fed Chair Kevin Warsh was brought in by President Trump to lower rates, not raise them. I’m certain Mr. Warsh and other members of the committee want to avoid an increase if the Iran conflict can be resolved in time for the next meeting. If that happens, oil prices will fall and there will be cover for inflationary metrics to trend lower. Every time the Trump Administration announces a resolution, negotiation, or agreement with Iran—even though it never sticks—the price of oil falls. Heading into the November midterm elections, you can bet the Administration would love for oil prices to drop and rates to hold.

This uncertainty forces the larger multifamily industry to wait.

Equity is scared of real estate, and there are plenty of alternatives. More highs in the S&P 500, hot IPOs, and the recent AI trade have made equity markets far more attractive. There’s no shortage of dry powder that says it wants to invest in real estate, but everyone is being very picky in finding the right deal—one with a story they can sell, and a return high enough to get investors to consider it. Once equity believes in the larger multifamily comeback story, the market will improve. Until then, any uncertainty is more cause to pause than reason to be contrarian.

One contrarian is Mr. Linneman. In addition to calling for multiple rate cuts, he thinks investors are overly pessimistic toward multifamily today. New apartment starts are falling nationally, demand seems to be firming up, and the renter seems to be in good financial shape. Lenders remain plentiful, though real sellers can be hard to find.

Should interest rate volatility determine whether you’re a buyer in this market?

If you invest in a market where rents are actually increasing, a 25-to-50-basis-point rise in short rates shouldn’t hurt your deal. Spreads on agency loans have a knack for thinning to offset a change in the base rate, keeping the financing flywheel spinning. But in markets where rent growth remains uncertain, interest rates are just another excuse to sit on your hands.

If you have a longer-term horizon, rates really aren’t projected to be much higher than where they are today. Assuming property NOI grows, you should have no issue refinancing, and a buyer should be able to secure sufficient new debt. I understand the impact interest rates have on an investment, but if your pro forma is that sensitive to short-term volatility, then perhaps it’s not that great a deal. I’d rather buy a property with negative leverage but an actionable path to higher rents than wait for the perfect storm of lower rates plus rent growth. Once that arrives, you won’t like the cap rate—and that’ll be the new excuse.

There’s no doubt that interest rates affect real estate in many ways. As a levered asset (most of the time), it has to factor in. At every real estate conference, interest rate predictions seem to be the most asked-about question. It’s on everyone’s mind. And it’s something that can’t be accurately predicted, as the first chart shows. Directionally, though, interest rates can help assess the health of the market, but on their own they don’t determine the quality of a new deal.

Interest rates are only one component, and a secondary one at that. Be the contrarian in this market. Find submarkets poised for growth. Do that, and rates won’t keep you on the sidelines.