One of the key elements in real estate investing is having a stable interest rate environment, which has been the case in the multifamily sector in recent months. While observing the Canada Mortgage Bond (CMB) over the past year reveals some fluctuations, it has shown remarkable stability recently compared to the volatility experienced in 2022.
Multifamily brokers closely monitor the CMB, as it directly impacts multifamily investors and buyers who secure financing based on its rates. The CMB represents the lender’s (bank’s) cost of funds, with the bank adding its profit margin on top. For example, if the CMB is 3.20% and the bank adds 80 basis points (bps) as profit, the investor’s mortgage interest rate for that loan would be 4%.
How does this current stable environment benefit multifamily investors? Here are four key advantages:
Predictable Financing
Costs It is challenging for multifamily investors to make offers or determine the right purchase price without knowing the interest rate at closing.
For instance, if a property generates $100,000 in net operating income, an investor’s valuation approach will differ significantly at a 4% interest rate versus a 6% rate.
Stable interest rates reduce this uncertainty, mitigating interest rate risk and allowing investors to move forward with confidence.
Improved Valuations
Volatile interest rates make it difficult for multifamily brokers to provide accurate pricing estimates for sellers. Sellers rely on brokers to gauge market pricing, but fluctuating rates create uncertainty.
If rates rise from 4% to 6% during the listing period, valuations can change dramatically, impacting negotiations and closing timelines. A stable interest rate environment simplifies valuations,
benefiting sellers, brokers, and multifamily investors alike.
Enhanced Investor Confidence
Investor confidence thrives in stable environments. When interest rates are volatile, many investors hesitate to make offers, opting instead to wait on the sidelines. Stability encourages multifamily investors to actively pursue acquisitions, facilitating smoother transactions and a more dynamic marketplace.
Better Long-Term Planning
Volatile interest rates make strategic planning difficult. Investors may be reluctant to take short-term loans (12-24 months) due to fears of rate hikes during the holding period. In contrast, a stable interest rate environment allows multifamily investors to confidently pursue short-term loans, optimize properties, and refinance into long-term financing solutions. This flexibility supports both short-term opportunities and long-term growth strategies.
As we commence 2025, multifamily brokers, multifamily investors, and property owners are hopeful for continued interest rate stability. Such an environment not only fosters growth and confidence but also enables better planning and valuations for the multifamily sector. Here’s to a prosperous and stable year ahead for all stakeholders in the multifamily real estate market!
