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Grant Cardone has been sounding the alarm about a real estate correction in multifamily properties, and one of his recent X posts added more fuel to the fire. The real estate mogul and bestselling author has acquired many multifamily properties, but he believes the asset class is due for a deeper correction.
“Oversupply creates increased vacancy,” he told investors on X when explaining the current trend. However, Cardone didn’t stop there. He shared three big reasons why these properties will continue to face short-term pressure.
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Cardone first cited the Federal Reserve’s interest rate hikes. Although the Fed reduced rates three times last year, they remain much higher than they were a few years ago. Landlords with variable-rate mortgages typically have to raise costs to preserve their profit margins during rate hikes, but that reduces demand from potential tenants.
Higher interest rates can also make homeownership more attractive for people who can make big down payments. As more people buy homes, the demand for rental units will continue to decline.
However, those higher rates will also limit each potential tenant’s buying power. Higher interest rates make it more expensive to take out personal loans and hold credit card debt. These factors may force landlords to keep rent prices steady or lower them to attract new tenants.
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Cardone also mentioned $3 trillion in debt that is set to mature in the next 36 months. Most multifamily property owners financed their properties in a low-rate environment, especially borrowers whose loans mature within the next 36 months.
When these loans mature, borrowers will have to refinance the loans at much higher rates. Cardone says that these multifamily property owners will have to pay down debt by 20% to 30% to cover the elevated cost of debt.
Not all of them will have that type of cash available, and that’s not good for the market. Landlords will have to raise prices to keep up with higher rates, but that action can prompt potential tenants to hold off on renting a multifamily unit.
It’s also important to consider how multifamily properties are valued. Real estate investors look at a multifamily property’s cash flow, profits, and other metrics when assessing its value. Higher interest rates will hurt cash flow, and that will put more pressure on multifamily property valuations.
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Cardone wrapped up his list by explaining that “multifamily overbuild” has created an oversupply. An oversupply of multifamily properties leads to higher vacancy rates, which forces property owners to lower their prices. Reduced prices result in lower property valuations and can add more fuel to a correction.
The oversupply can also reduce rent growth rates, which suggests a relatively slow recovery for investors. More than one million multifamily units were under construction last year, and that’s the highest on record. The oversupply is more pronounced in the Sun Belt, which has attracted many people since the pandemic.
Constructions have slowed down in response to oversupply, and rising rates suggest that construction projects will remain on the slow end.
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This article Grant Cardone Reveals The 3 Reasons Why Multifamily Properties Are In A Correction: ‘Oversupply Creates Increased Vacancy’ originally appeared on Benzinga.com