Multifamily Cap Rates Stabilize After Three Quarters of Increases

In the long run, it is assumed that average rent will grow at about 3.1%.

By Philippa Maister

July 25, 2023

Cap rates for prime multifamily assets stabilized last quarter amid signs of a slight improvement in recent growth, according to a recent analysis by CBRE.

“After increasing between 20 and 40 basis points in each of the past three quarters, the average prime multifamily going-in cap rate increased by only 1 basis point in Q2 to 4.73%. Exit cap rates fell by 5 basis points. Underwriting expectations for annual asking rent growth over the next three years remain unchanged in Q2 at 2.9%,” the analysis found. “The spread between going-in and exit cap rates is a slim 21 basis points and appears to be stabilizing.”

Underwriting assumptions are for the highest quality assets in the best location in 15 markets throughout the nation.

Expectations for prime multifamily annual rent growth over the next three years remained unchanged after several quarters of deceleration. Gateway markets benefited most with slightly better average rent growth prospects, though secondary markets are catching up. In the long run, it is assumed that average rent will grow at about 3.1%, slightly higher than the 2.9% expected in Q2. “As markets stabilize, rent growth assumptions likely will drift higher and eventually settle near the long-run average,” the report noted.

The fact that there was only a slight rise in the going-in cap rates in Q2, while exit rates fell, indicates that the spread between the two is stabilizing, the report concluded.

Before that happens, however, the Fed is expected to raise interest rates one more time, potentially precipitating another rise in cap rates.

Maister, Philippa. “Multifamily Cap Rates Stabilize After Three Quarters of Increases.” GlobeSt, 25 July 2023, www.globest.com/2023/07/25/multifamily-cap-rates-stabilize-after-three-quarters-of-increases/?slreturn=20230628132034.