This week we are featuring a commentary from Brad Miller, President of Encore Multifamily Division. In it, he discusses the current interest rate environment and how Encore has positioned their operations to mitigate the impacts of a rising interest rate environment, as well as why investors should be looking to real estate as a hedge against inflationary trends.
Many questions in economists’ minds today revolve around the timing of when today’s historically low interest rates will rise, as they inevitably must, since it is the question of the decade. Let’s speak with Brad Miller, President of Encore’s multifamily division, about interest rates and how Encore has successfully leveraged itself in protecting their investors from higher interest rates as well as rising inflation.
With the economic recovery in high gear, it would seem that it is just a matter of time before the inevitable occurs. The only question is WHEN?
”When interest rates rise, the negative impact on commercial real estate will, no doubt, include lower cash on cash returns due to rising interest rates. Also, the likelihood of cap rates rising is inevitable, which will in turn negatively affect the value of commercial real estate. Therefore, in a rising rate environment, the premium placed on locking interest rates at today’s historically low fixed rates is a smart move.”
“In addition, rising interest rates have been a precursor to, or an influence on, inflation. As the economy continues to heat up, investors should be flocking to products which can provide a hedge against inflation and protection against the rising interest rates. That is Encore’s strategy in the multifamily industry.”
“At Encore, we have addressed the above strategy through the execution of our multifamily development program, underpinned by long term fixed rate financing for 40 years. Encore Multi-Family takes advantage of the HUD 221(d)(4) program. The major benefits of the market-rate HUD 221(d)(4) construction and development loan program are (1) 40 years fixed interest rate, (2) no affordability requirement or set aside for low or moderate income residents. Therefore, there are no rent restrictions and rents can, therefore, be set by the market, not a governmental agency. The program allows a developer to take advantage of today’s historically low interest rates lower rates, locking them in for 40 years, and therefore eliminating the refinancing risk of a typical 3 to 5 year construction loan. The beauty of the 221(d)(4) program is that it permits a developer to do so without becoming encumbered by government rent restrictions or affordability components present in many other HUD financing programs.
“Let’s talk about inflation. Apartments have historically been one of the best hedges against the impact of inflation due to the short term nature of leases, which translates into opportunities to raise rents to keep pace with inflation. In a perfect world, why wouldn’t you focus on investing in a project which protects you against inflation, as well as rising interest rates, that offers the investor superior risk adjusted returns?”
Encore Grand Mission, which is currently featured on RealCrowd, is Encore’s 8th project of this genre. The multifamily division has realized returns averaging over 20% on all 7 of those projects. It is our knowledge of the industry and underwriting strategies that make Encore’s investments so successful.
President, Encore Enterprises