A Hawkish Fed, 5 Refi Moves & SFR Lock-In

release edition [088]

read time [8 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

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Today at a Glance:

Fed: Hawks Are Circling
Refi: Higher For Longer
SFR: The Lock-In Effect
Weekly Listen: More Doors

MultiScreen Update

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Now, let's talk about what Kevin Warsh just did.

Hawkish Moves

Last week in TMD 087, I examined three "what happens if" scenarios with each of the possible Fed outcomes, and I wrote that I'd be surprised if they hiked into an energy shock since higher interest rates can't produce more oil.

Well, they hiked.

On Wednesday the FOMC raised the target range 25 basis points to 3.75% to 4.00%, the first hike since 2023, and they did it unanimously in a twelve to zero vote.

The market saw this hike coming (CME had it near 87% the morning I sent TMD 087), so despite my logical reasoning, the Fed decided that they needed to act.

The irony here is that inflation was likely to cool once the energy shock faded regardless of what the Fed chose to do, which makes this decision all the more troubling.

But what matters most is what Warsh signaled next, as he didn't frame this decision as a one-off hike.

"Inflation is too high and has been for too long," he said, and the Fed "removed a dose of accommodation."

He went further and said financial conditions outside of housing and agriculture can't be called restrictive, which is about as direct a signal as a Fed chair gives that he doesn't think he's done.

The Fed's own projections back that up: 16 of the 19 members now pencil in at least one more hike before year-end, and the dots don't have core inflation back to 2% until 2029.

The bond market got the message. The 10-year Treasury, which had been drifting down earlier in the day, climbed right back to 5%, and the 30-year UST sits around 5.33%, and stocks gave back roughly a percent to six-week lows.

This is the yield-curve volatility I flagged as prediction #6 back in TMD 052.

For our Multifamily sector, the translation is simple and not much fun, unfortunately.

Higher-for-longer is no longer just a talking point. Every loan maturing in the next 18 months is refinancing into a cost of capital that's materially higher than almost every owner modeled at acquisition 5 to 7 years ago on both ends of the curve.

And perhaps most meaningfully, cap rates won't compress from today's levels when the risk-free 10-yr UST rate is sitting at 5.00% and capital is unlikely to meaningfully rotate back into Multifamily in the near term.

Summary

The Fed hiked unanimously and signaled it isn't finished. The bigger story is that the Fed has now told the market twice, in Warsh's words and in the dot plots, that he's willing to keep policy tight to curb inflation. This reality must be acknowledged and confronted in every underwriting model going forward.

Actionable Takeaway

Pull the exit cap and interest rate assumptions on every deal in your pipeline and re-run them with the 10-year at 5.00% and no cap rate relief priced in for 2027. And if you own anything maturing before mid-2027, the next section is for you.

Refinancing

Well, the maturity wall is officially no longer just a hypothetical slide in a deck, but instead it's a challenging math problem sitting on balance sheets that (most likely) isn't going away anytime soon.

There are several hundred billion dollars of multifamily loans coming due in the next 12-24 months, and a big share of those loans were originated when the 10-year Treasury was 2% or lower.

Here are a few things to consider when approaching a loan maturity in this "higher for longer" environment.

1. Open dialogue 12 to 18 months out.

Waiting in today's environment makes the refinance process tougher on everyone involved, especially the borrower. Begin conversations as early as the lender will allow, and start thinking through all possible scenarios: a takeout refinance, loan modification and extension, sale or short sale, etc. Most lenders appreciate proactive borrowers, especially when there's a problem that must be solved collaboratively.

2. Carefully monitor rate cap costs.

Caps have repriced meaningfully in the past 6 months, and a rate cap that was a rounding error in 2021 now costs real money and will eat into cash reserves or cash-out refinance proceeds. An expensive replacement cap can quietly derail a business plan by leading to a forced a sale at an inopportune time.

3. Run the cash-in refi math now.

With values down from peak, many loans originated in 2021 and 2022 simply won't refinance at par. Knowing the refinance shortfall given today's in-place DSCR will help inform reforecasting efforts and scenario analyses. Sometimes the answer is a paydown, bringing in fresh equity, or a reluctant sale, but the appropriate strategy can't be selected without knowing the real-time information.

4. Stress-test DSCR realistically.

Excess debt service coverage that looked comfortable previously is now inevitably going to be stretched or challenged given the run up in rates. Understanding the math will inform the viability of a future refinance at maturity.

5. Decide extend vs sell before the lender.

Part of why the distress data has plateaued is that lenders are still extending and modifying rather than forcing the issue. That's a gift, but it won't last forever. The best sellers in this cycle will be the ones who chose their timing while they still had options. If the uncomfortable truth is that the deal won't refinance in 12 to 18 months then choosing to reluctantly sell is far better than handing back the keys in 18 months.

One note on the distress backdrop, because it's more nuanced than the headlines. Multifamily CMBS delinquency held at 7.69% in August, flat after the 46-basis-point jump I flagged in TMD 083, and still near a nine-year high.

But special servicing actually improved two basis points to 8.37%, and multifamily was one of only two property types to see servicing improve at all.

Back in TMD 076 I asked whether the distress wave was cresting. The August data doesn't say cresting, but it does say plateauing, and plateauing is what "extend and pretend" looks like in a data set. This trend is worth monitoring as time goes on.

Summary

Higher-for-longer turns every near-term maturity into a live decision about rate caps, debt service coverage, and the resulting equity needs. Distress is being managed by lenders who are still willing to extend, which is exactly the window in which good operators get ahead of their maturities rather than getting surprised by them at the eleventh hour.

Actionable Takeaway

Build a one-page maturity map for your whole portfolio this month: loan, maturity date, current coupon, rate cap status, and current in-place DSCR at today's interest rates. Prioritize and attack this list with focus, strategy, and healthy communication.

SFR: Lock-In Revisited

There's one place a hawkish Fed actually helps multifamily landlords, and it's a theme I first wrote about back in TMD 005 in February 2025, "the unintended consequences of cheap debt: the lock-in effect."

The idea then was simple. Roughly 80% of mortgage holders were sitting on rates of 5% or lower, and almost none of them wanted to sell and trade into a higher payment.

I told the story of a friend with a 2.5% thirty-year mortgage on a house in Boise who would rather rent it out and rent in California than give up that loan. (Update: He has since moved back to Boise and now lives in the home as his primary residence).

The result was a for-sale market in gridlock: 2024 single-family home sales matched 1995 levels despite 70 million more Americans, and nearly a third of homeowners told surveys they would never sell.

Nineteen months later the setup hasn't loosened much, and more recently, it's probably tightened.

I wrote TMD 005 with the optimistic hope that mortgage rates would eventually ease and lead to a healthier for-sale housing market. Instead, the 30-year fixed mortgage is back near 7%, and barring a black swan event, the market is unlikely to receive much mortgage rate relief soon.

Homeowners with sub-5% mortgages now has even less of a reason to move today than they did in early 2025. That lock-in effect will continue to keep for-sale inventory muted, all while would-be buyers are now happy renters with the PITI to own a home up by several multiples of what it was just five years ago. The ripple effect is a demand tailwind for Multifamily.

This is the K-economy showing up in the housing decision. The household that could almost stretch to a down payment two years ago is now looking at a 7% mortgage, a home price that hasn't fallen enough, and a payment that dwarfs their rent by 2-3x. So they renew.

Elevated mortgage rates push marginal buyers back into for-rent housing. This isn't enough to make a weak market look strong, but it bolsters the demand side of the equation, especially in markets with a structural and material gap between the cost of owning a home versus renting.

Summary

Higher rates are a headwind for balance sheets but a tailwind for rent rolls. The lock-in effect I wrote about in TMD 005 has only deepened since early 2025: aside from forced sellers, most sub-5% homeowners will not be selling their home into a 7% mortgage rate environment, so renters remain renters and the pool of people who "would have bought" keeps renewals healthy.

Actionable Takeaway

In your renewal and retention modeling for 2027, give explicit weight to lock-in-driven demand in the markets where homeownership is most out of reach. The move-out-to-buy line on your turnover surveys should be dwindling. If it isn't, find out why before thinking through next year's renewal strategy and finalizing 2027 budgets.

Weekly Listen

This week's listen is a little different, because I'm the guest. I joined Matt Buchalski on the More Doors Podcast for Episode 72.

Matt and I got into a lot of what I've been writing about in The Multifamily Download. We covered why supply-constrained coastal markets like San Francisco are posting double-digit rent growth while much of the Sun Belt keeps grinding through oversupply, why I underwrite to untrended yield-on-cost, and how agency lenders are stress-testing sponsors into higher day-one cash yields.

We also talked through how I built MultiScreen, and whether the market bottom calls from the likes of Blackstone and CBRE reflect the fundamentals, or the fact that they're talking their book. It was a fun conversation so I hope you'll give it a listen!

You can listen to the full episode here.