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As the Federal Reserve continues to increase interest rates to curb inflation and slow down the economy, apartment investors are forced to reevaluate strategies and contemplate how to best capitalize on current market conditions. As a result, property owners face one major question: whether to sell or refinance their assets.
Although normally refinancing might present the option to obtain a new loan with better terms — including lower monthly payments, shorter prepayment periods, or switching from a variable- to a fixed-rate loan — higher mortgage rates are making it more difficult to lock in these opportunities. And if you’d rather sell your property, it may be more challenging than you expect, as outlined further below.
The Mortgage Bankers Association in its latest forecast revealed that total commercial and multifamily mortgage borrowing and lending is projected to fall to $766 billion this year, down 14% from the $891 billion recorded in 2021. Multifamily lending alone is expected to represent $455 billion of the total volume in 2022, down 7% over the record $487 billion registered last year.
Recalibrating Investment Strategies
Due to substantial demand for rental housing across the country, driven by population growth and housing shortages in most markets, property values have grown dramatically over the past couple of years, increasing the appetite for multifamily investment. Thanks to bidding wars across the nation, the apartment market quickly turned into a seller’s market.
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However, amid today’s economic conditions, sellers are compelled to adjust their expectations as buyers simply can’t afford to pay the prices they could’ve paid one year ago. This is prompting many property owners to hold onto their assets and shift their strategies toward a longer-term horizon.
Selling a property for a lower price and then moving to another with a higher rate simply doesn’t make sense. Furthermore, if property owners had already locked in a long-term fixed-rate loan before rates started climbing, the best strategy to embrace may be a wait-and-see approach.
When it comes to owners facing near-term debt maturity, the decision to sell or refinance is far more pressing. Nonetheless, while refinancing a property might not provide the same benefits as it did six months or a year ago, locking in longer-term fixed-rate loans can help owners shield themselves from further rate increases.
Developers who plan to hold their projects instead of selling will also likely refinance their properties to swap their adjustable-rate mortgages for permanent loans. For those planning to accelerate refinancing plans, life companies, banks, and credit unions might provide the best options, as these lenders often offer early rate locks to protect clients from increasing rates.
Additionally, savvy investors looking to hold their properties for a more extended period might consider taking a cash-out refinance to tap into equity accumulated over the years. The highest-quality properties with the most attractive amenities will have an easier time keeping occupancy levels elevated to ensure consistent cash flows during economic volatility. A cash-out refinance allows owners to invest the extra cash into property upgrades to make them more attractive to renters and ultimately turn them into a strong hedge against inflation.