Client Corner: Investors Undeterred by Higher Interest Rates
Central Denver Apartment Market Report: Page 2 & 3 of our 2017 Q4 newsletter
There was a pronounced increase in interest rates a year ago, and we seem to be facing another jump. For our clients, thoughts of a 5-year loan at 4.25% are starting to fade. Interest rates are on the rise again.
We were particularly spoiled in Denver over the past several years. Our local economy was strong, apartment values were rising, and yet interest rates remained low; held down by a series of concerns over national and international economic unease. While interest rates remained below 4% for most of 2015 & 2016, investors watched rates reach and exceed that threshold in the past twelve months.
So, why haven’t sales prices fallen as interest rates have risen? There are several reasons prices remain resilient. First, as noted in our cover story, Supply and Demand are out of balance. Second, 1031-exchange buyers and investors flush with cash are writing the winning offers; interest rates are less of a concern for investors making hefty down payments. Prices should decline if we return to more “normal” market dynamics.
Typically, we would expect that if interest rates increased from 3.4% to 4.4% (like they have in the past 18 months), that CAP rates would also increase about one percentage point. That would have meant 5.25% CAP rates “should” have increased to 6.25%. The impact – – a 12-unit building valued at $2,400,000 “would” have decreased in value to $2,016,000. That’s a 16% drop, that most of our clients are happy to have missed!
How the market reacts in 2018 will likely be driven by the size and duration of the current interest rate spike. Ladies and gentlemen, place your bets!
by Greg Johnson