Return of the Dove, Hidden Demand Risks, & More

release edition [033]

read time [6 minutes]

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

Today at a Glance:

Rates: A Dovish Return
Demand: Hidden Risks
Weekly Listen: TreppWire 347

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Rates

Have you ever expected to receive something but didn't get it? (Such as receiving this newsletter today instead of yesterday).

This is how much of the World feels about the Fed's interest rate policy. The ECB has cut rates to their r* rate (or natural rate) with much of the same inflation data as the United States, and yet, the Fed admittedly has not, with Jerome Powell acknowledging that policy today is in "restrictive territory" (see quote below).

Well, the Fed's anticipated rate cuts may be coming soon.

This week, Fed Chair Jerome "Too Late" Powell shared remarks from Jackson Hole, WY that were broadly interpreted as dovish, which turned the equities markets loose, with the S&P 500 index rising nearly 1.50% on Friday, 8/22.

In case you missed the speech, you can watch it here or read the transcript here.

From Mr. Powell:

"Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment."
"Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."

What happens if the market receives the anticipated Fed Funds Rate cut in September?

There's a case to be made that long rates could move either up or down. Here are a few thoughts on each.

The Case for Rates Up

Upcoming rate cuts could lead to net-negative market sentiment and lead to a selloff of U.S. Treasuries, pushing long rates higher as the yield curve normalizes from a 10Y-2Y spread of ~58bps today towards the historical average of ~85bps.

I shared the below comments a few weeks ago in TMD 029, and here they are again for reference:

So why would rates rise again?

I have a working theory that's still under construction, but here's what I have so far.

1. The Fed's "Independence" would be undermined given that President Trump has publicly reprimanded Jerome Powell for not cutting rates. The ripple effect here is the risk of public perception that the U.S. President's power is too far-reaching. The if-then logical thought becomes, "Well if Trump can influence monetary policy via brute force, what else can (will) he influence?"

2. 'Risk on' investing will come roaring back in an attempt to front-run future growth and in doing so, a major rebalancing may occur from safe assets (bonds, money markets, cash) into risk assets (stocks, real estate, crypto). I would argue this is already happening in the U.S. economy, as evidenced by tremendous capital flows over the past 60 days into stocks and crypto, and cutting rates in 2H 2025 would likely only accelerate this trend.

3. Erosion of confidence is also a real possibility because if the Fed cuts rates, the market at large will ask itself "Why now?". If the readily available answers aren't sufficient or obvious then the natural inclination is to assume "The Fed must know something about the economy that I don't", and this uncertainty could lead to a sell off in Treasuries and upward movement in yields.

As I wrote about last week in TMD 032, this year has reaffirmed the benefit for maintaining a sanguine outlook of the future (see: Liberation Day V-shaped stock market recovery).

So while I'm hopeful that long rates (T-Notes and T-Bonds) won't rise with upcoming Fed rate cuts, I do realize that it's a possibility, especially given the flat nature of the yield curve with Fed Funds at ~4.33% and the 10Y-2Y spread below the historical average.

The Case for Rates Down

If the Fed cuts then it's reasonable to assume that longer rates (5-, 7-, 10-, 20-, and 30-year) will fall too, as this is what typically occurs naturally.

When the short term Fed Funds Rate drops then dollars that have been enjoying the risk-free (and fully liquid) rate of ~4.33% will now receive a lower return.

If this risk free rate is no longer producing a "real return" (i.e. interest rate > inflation) then those dollars will find a new home. ICI currently estimates that there are $7,190T dollars sitting in Money Market Funds enjoying real returns.

Inevitably, some of these dollars will move into risk-on assets (equities, crypto, Real Estate) and some will move into risk-off assets (T-Bills, T-Notes, T-Bonds).

This net-new demand should push interest rates across the yield curve down and prices up.

This is why the rate cut in September 2024 was so precarious -- the Fed cut without much substance or conviction for doing so, because these cuts were into a relatively strong economy.

According to this JPMorgan article from earlier this year, the graph below suggests two main drivers that played into the Bond sell off in late 2024: stronger growth expectations and heightened macroeconomic uncertainty.

Will the likely September cuts have a similar impact on interest rates at the long end of the curve?

I'm not sure, but I would be surprised if long rates spiked like they did one year ago.

Today's economy is experiencing slower GDP growth than in 2024, much of the tariff uncertainties are behind us, and it's clear that the U.S. Dollar is not going anywhere.

If anything, the advent and mass adoption of stable-coins will create accelerated demand for dollars to pour into buying U.S. Treasuries, pushing long rates down.

Only time will tell, and there's always room for something unexpected to occur (i.e. a black swan event), but I think the odds are better than not that long rates will begin to slowly fall if (or when) the Fed resumes it's cutting cycle.

What do you think? Should the Fed cut in September?

Demand

Recent Multifamily headlines have been touting strong renter demand in 2025, and rightfully so -- the top-line renter demand has been remarkably strong, and understandably so. Homes are out of reach (or undesirable) for most, and everybody has to live somewhere, right?

While headline demand has been strong, I have yet to see any research that focuses on the levels of concessions and implication on today's net effective rent as compared to the future net effective rent when those concessions burn off.

From what I've seen, heard, and experienced as an active market participant, concessions are prevalent today across most markets and asset classes (i.e. A-, B-, and C-Class), and show no signs of receding.

Yes, strong demand is great, but there's a counter-argument to be made that this demand should be asterisked, as it is *incentivized demand*. As such, the conclusion would be that renters today are paying an 8-16% discounted net effective rent today that could rise by as much as 10% to 20% upon renewal (i.e. if their original 1- or 2-month concession burns off).

The result? Either the concessions must continue or residents would need to find a less expensive place to live.

Yes, there are counterarguments to this, including improving affordability thanks to 25+ months of real wage growth, that most concessions are being offered by newer properties, and that newer properties are typically built in markets or submarkets with strong demand drivers.

I acknowledge all of these variables and arguments, but my concern remains: What's going to happen to occupancies or rent levels as leases expire and concessions must be re-offered in order to retain residents?

I hold these reservations about the demand side of the equation over the next 12-24 months in large part because I've already seen this playing out in multiple markets, and yet nobody is talking about this downside demand risk.

Hopefully I'm wrong, but I get the sense that demand for market rate multifamily is going to experience some headwinds in the not too distant future.

Have you seen this happening in your markets? Are concessions being offered for new leases and/or renewals?

Weekly Listen

This week's listen is Ep. 247 of the TreppWire Podcast featuring guest Samir Tejpaul, Managing Director, Head of Capital Markets at Madison Reality Capital in New York.

This episode covers a lot of ground, and I found the demographic discussion that begins at minute 10 particularly interesting.

While REPE and equity investing are fun to discuss, I'm hopeful this podcast featuring a lender guest will provide a helpful alternative perspective.

You can listen to the full episode here.

Wrap Up

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