Creating and sustaining value in a rising interest rate environment is challenging for any real estate investor. In May 2022, the Federal Reserve raised its policy rate by half a percentage point, the largest rate hike in 20 years. This followed an increase of 25 basis points in March 2022. With higher policy rates, spread product—borrowing rates that are set off the policy benchmark—have risen even further. Interest rate risk is now complicating an already complex market for investors.
A Focus on Real Rates
While it may be unconventional, at Grubb Properties we consider our debt portfolio through four metrics or characteristics:
- fixed rate
- floating rate
- real rate on the portfolio
- nominal rate on the portfolio
Real rates are inflation-adjusted rates that reflect the ‘real’ cost to borrow, whereas nominal rates do not account for inflation adjustment. With inflation now the highest it has been in decades and climbing, real rates are what we need to consider to see the true story and to understand the real value the loan portfolio is creating.
For example, if we lock in a 20-year fixed-rate loan at 4 percent and inflation records at 5 percent, our real interest rate is -1 percent in that year. Our fixed-rate loan is now creating value in real terms. In this context what appears to be a liability on the balance sheet is in fact performing as an asset when you look at it in terms of inflation and the real cost of borrowing.
With over 50 percent of our total multifamily portfolio being fixed-rate loans, we expect our debt to create added value for our investors for as long as this type of rising rate environment is in play, which is expected to extend years, if not decades.
In our nearly 60-year history, Grubb Properties has never had a property-level foreclosure, deed in lieu, or bankruptcy. We have learned that it’s not just about focusing on market selection and cost of entry, but also how we manage debt. That has played and continues to play a large role in our investment strategy, and our success. Our current portfolio of Link ApartmentsSM assets has an average loan duration of approximately 10 years, insulating our properties from the effects of rising rates.
In-House Expertise Navigating the Rising Rate Environment
Our in-house Finance Team members are experts at finding long-term financing solutions for our multifamily development projects. Historically, we’ve become specialists in loan packages that increase in value in a rising rate environment. This means we also feel less impact from things like rising construction costs, which have become a hot topic given supply chain and labor challenges.
The volatility of the past 20 years has provided strenuous practice in managing our assets and developments in both rising rate and declining interest rate environments. It’s a primary area that we solve for as part of our focus on addressing our national housing affordability crisis, adding much needed moderate-priced essential housing with our Link ApartmentsSM.
To learn more about how Grubb Properties manages debt in a rising rate environment, download our full paper here.