Recent research from CBRE indicates that prime multifamily assets have seen a slight improvement in going-in cap rates, exit cap rates, and unlevered internal rate of return (IRR) targets in Q1, 2024. This marks the first improvement since early 2022, when the Federal Reserve started hiking interest rates. These positive changes suggest that key underwriting metrics might have reached their peak, with potential rate cuts anticipated later this year.
The gap between going-in and exit cap rates, which previously narrowed over eight consecutive quarters, has now stabilized at 12 basis points (bps) in Q1. This stability is likely to persist unless there is a significant economic downturn.
CBRE notes that, while the overall average exit cap rate for prime multifamily assets is expected to remain above the going-in rate in the near term, some markets like Chicago, Washington, D.C., and Philadelphia have already seen cap rates invert. Conversely, Phoenix and Seattle have returned to a positive spread this quarter after previously achieving cap-rate parity, which continues in New York and San Francisco.
There was a slight decrease in both going-in and exit cap rates, which fell by 6 bps to 5.00% and 5.12%, respectively, in Q1. Expectations for annual asking rent growth over the next three years also declined marginally to 2.3%. Unlevered IRR targets fell by 9 bps to 7.59%. Except for Chicago and Philadelphia, all other prime multifamily markets tracked by CBRE showed stable or reduced IRR targets, with Denver and Los Angeles experiencing the most significant reductions.
Austin continues to display the lowest risk requirements for the 10th consecutive quarter. Quarter-over-quarter, most markets remained stable, though Los Angeles and Phoenix improved slightly in their rankings due to better underwriting metrics.
Regarding cap rate movements in Q1 of 2024, Denver, Los Angeles, Phoenix, and Seattle experienced moderate decreases in going-in cap rates, while eight markets saw no change. Minor increases of less than 25 bps occurred in Chicago, Miami, and Philadelphia. For exit cap rates, twelve markets showed no movement, but slight decreases were noted in Chicago, Denver, and Los Angeles.
Matt Vance, Head of Multifamily Research for the Americas at CBRE says, “We are observing notable improvements in underwriting metrics for prime multifamily assets, marking the first improvement seen in two years. This indicates a potential turning point in the market, with going-in and exit cap rates, along with the stabilized positive spread, showing positive trends. These developments suggest that key underwriting metrics may have reached their peak as the market anticipates potential rate cuts in the future. It is crucial for investors to closely monitor these positive developments as they navigate the multifamily market.”
Source: “After Two Year Slump, Prime Multifamily Metrics Uptick in U.S.“
