The minor decrease in rates last year will likely have little impact on overall investment volumes this year.
The Fed’s decision to cut interest rates last year were met with enthusiasm, but will they have an impact on investment activity in 2020? The answer really depends on the investment company and business strategy. For powerhouse workforce housing investor TruAmerica Multifamily, the decrease in interest rates will have little impact on the firm’s investment activity or business strategy this year.
“It certainly gives more confidence because if you can refinance at a lower rate, you get more cash flow, but it hasn’t really one way or the other changed our strategy,” Bob Hart, president and CEO of TruAmerica Multifamily, tells GlobeSt.com. “It has definitely helped the deals that are on the market or in some cases where we have underwritten at a certain level, it has been a net pick-up.”
One reason that the interest rate dip—or one that could come again this year—won’t drive buying power is because the firm buys based on a specific business strategy. “Interest rates don’t have much of an impact. We are buying on fundamentals,” says Hart.
In addition, TruAmerica often utilizes a variable interest rate on its purchases, making it less exposed to interest rate changes. “A lot of our financing is variable rate anyway, so even though indexes have gone down, spreads have widened,” says Hart. “People have been borrowing in the low to mid 3% on variable rates and high 3% , low 4% on fixed rates. It has really been that way, give-or-take 75 basis points, for a while now.”
And, this year, the firm’s strategy—a focus on affordable and workforce housing—will prove to be among the top investment segments for multifamily. “It is all about affordability. You are still going to have the renter by choice; that is never going away. But, the population is growing from the bottom, not from the top,” says Hart. “When you look at what is driving population, it is primarily immigration in coastal, blue states. The no-tax states and the purple states are seeing more in-migration where people are shifting away because they need more affordability. Everything points to affordability.”