The Federal Reserve announcement released last Wednesday about the shape of the nation’s economic recovery was followed by public statements by Chair Jerome Powell. During the announcement, the Federal Reserve projected the U.S. economy to grow 6.5% this year driven by the vaccine and federal spending plan, up from the central bank’s 4.2% estimate in December. The Fed also predicted that unemployment is expected to drop to 4.5% by year end.
“The economic fallout has been real and widespread, but with the benefit of perspective, we can say that some of the very worst economic outcomes have been avoided by swift and forceful action — from Congress, from across the government, and in cities and towns across the country,” said Powell during a press conference last Wednesday.
Key Takeaways from the Federal Reserve Announcement
Overall, statements by Mr. Powell expressed a relatively rosy outlook for the nation’s economy, a promising sign for continued pace of strong multifamily development in 2021. Here are a few of the major points that stood out during Mr. Powell’s remarks:
- A brief period of nominal inflation may occur (the Fed’s internal estimates suggest a peak at 2.1%), but many observers on Wall Street will take these bullish statements with a grain of salt and attribute some of the optimism to the Federal’s desire to project confidence and limit the need for an interest rate hike amid the recovery.
- Job numbers are expected to dramatically improve but investors should keep their expectations realistic. The situation will require patience as millions will remain out of work for a good portion of 2021. During his remarks, Powell put it plainly: “It’s going to take some time, no matter how well the economy performs.”
- Interest rates are expected to remain level through 2024, according to the current schedule, though 7 of 18 Fed officials expect a tax hike to taper the impacts of inflation (such as the surge in value of 10-year bonds) response to reflation could occur as early as 2023. Directly following the announcement, the 10-year Treasury yield eased to 1.41% in response to the Fed signaling a dovish approach for the immediate future.
- A closer look at the Fed’s own historical numbers, however, suggest that the rate of inflation may in fact exceed “just over 2%” over the next three years (closer to 3%-3.5%) and if that happens then the Fed could end up rolling out a hike on interest rates sooner than 2023.
How Will These Trends Affect Multifamily in 2021?
One of the most immediate impacts of the announcement was renewed confidence that the Federal funds rate is expected to remain at or near zero over the next two years. These conditions, along with the recent bump in the 10-year Treasury yield, suggest investors are selling their bonds and ramping up their investments into reliable, high-return assets.
Despite a minor increase to borrow money, this is a promising sign for the multifamily industry. As the 10-year Treasury yield grows so too will 30-year fixed mortgage rates, creating greater obstacles to purchasing a home for young adults, and a subsequent increased demand for multifamily housing.
Furthermore, recent data from Real Capital Analytics suggests that investor appetites for multifamily property was hindered but not halted by the pandemic. While the total number of investor originations in other properties like retail and office saw a sharp dive during the pandemic, multifamily experienced a far sharper decline before quickly plateauing and regaining pre-COVID momentum.
Additionally, the recent release of additional financial aid from Congress to support nationwide economic recovery undoubtedly stoked investor interest in multifamily development. New upticks in cases and hospitalizations could dampen this momentum, but currently the stage is set for a strong rebound for the multifamily industry from the previous year.
Review Berkadia’s Multifamily Forecast for market-level insights on where the most investor activity is already scheduled for the rest of 2021.