Interest Rates on the Rise & Jobs Fuel Vacancy Decline
Central Denver Apartment Market Report: Cover page of our 2018 Q1 newsletter
In April 2016, our clients purchased a Capitol Hill building by putting 25% down, and financing 75% of the purchase price with a loan at 3.55% annual interest, fixed for 5 years. Oh those were the days!
75% loans are nearly impossible to find now; and interest rates are back over 5.0% for the first time in many years. Over the past five years, low interest rates helped drive property values and sales prices to record levels. It will be interesting to watch what happens as rates climb back up to “normal” levels.
Apartment investors have seen rates stubbornly remain .75 percentage points higher in 2018 than they were in the same month of 2017. As a result, transactions have become more difficult to finance with conventional loan terms, and lenders have begun to reduce the size of loans they are willing to make. It is becoming more common to see loans being capped at 65% of the purchase price, due to the constraints of the debt coverage ratio and the increasingly conservative approach of lenders at this point in the market cycle.
With tighter lending parameters, we expect to see crash and 1031 exchange buyers continue to have a greater advantage over investors that finance their acquisitions. In the coming year, higher interest rates and constrained loan amounts should put downward pressure on pricing. It is going to be a much more difficult to sell buildings offering only a 5.25% CAP rate; and as CAP rates rise, prices fall.
by Greg Johnson