July 8, 2022

Interest Rate Hikes Impacting Multi-family Residential

Interest Rate Hikes Impacting Multi-family Residential

Rising inflation and costs combined with hikes in interest rates are having an impact these days on the multi-family real estate market.

Both bad and good, actually.

Let’s look at the bad first.

The current sentiment in the industry believes many developers are building rental properties because of low interest rates and the pro forma still works for them.

But as the Bank of Canada continues to hike interest rates into the fall, many of these projects will be sidelined and might start to flip into condo developments.

With cap rates so low right now at four or five per cent, if interest rates go above cap rates, the question is how that will impact the lenders’ perspective on a project as they don’t want to be necessarily lending higher than the capitalization rate.

But that really has been the case for years in places like Vancouver and Toronto where cap rates have been around three per cent while mortgage rates have been three or four per cent.

For Alberta, this is new territory as cap rates have been so high.

The loan sizes in the future might be lower for developers and investors because of higher interest rates and many projects just might be put on hold.

But there is good news too for landlords with higher interest rates.

On the flip side, with rates going higher it puts a damper on homeownership. With mortgage rates starting to take a bigger bite out of a family’s household budget, it might not be such a great idea now for some to buy a property. That will push more people into rental as opposed to ownership.

That’s appealing to landlords. More renters equate lower vacancy rates and and stronger cash flows.

Also, to recoup some of the losses due to interest rate hikes, landlords can also increase their rental rates enough to cover those additional costs but not so much that it dissuades people from renting.

Increased rental rates would make new developments even more feasible.

The housing markets across the country have cooled off in recent weeks as mortgage rates have risen and the idea of homeownership becomes a little less appealing for a growing number of Canadians, particularly in major cities such as Toronto and Vancouver, but even in places like Montreal, Ottawa, Calgary, Edmonton and elsewhere.

When it comes to interest rates, and their increasing nature, for landlords it’s not necessarily bad news.

Chris Chornohos has a passion for real estate and helping his clients reach their business goals by providing Real Estate Investors and Owners with the first class valuation and advisory services to close more deals. Chris is also an investor, builder and developer. Reach out to Chris today to help with your Real Estate needs. 

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Chris Chornohos is a leading real estate consultant, investor and developer with extensive experience within the commercial real estate industry. Contact me today.

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