The small multifamily market has begun to pick up again, according to an Arbor Realty Trust analysis. But future monetary policy looks less accommodative, which could interrupt the normalizing trend.
Valuations of small multifamily properties started to rise again in 2024 Q3 and Q4 and origination volumes were up 5%. But things started to change toward the end of the year. Long-term interest rates began to increase as yields on the 10-year Treasury began to climb. They came down into early March, but then reversed and started to climb again as new tariffs took effect.
That caused the small multifamily market to become more cautious as cap rates and debt yields rose and loan-to-value ratios dropped. However, the sector is “positioned for stability” because of the need for affordable housing in the U.S.
Asset valuations were down 2.1% year-over-year in Q4. That was the seventh consecutive quarter of price declines. But, as Arbor wrote, negative annual growth hasn’t tamped out optimism. Decreases have slowed in each of the past three quarters, and there was one quarter-over-quarter increase of 0.7%. Prices also rose to 1.5% in the third quarter.
Small multifamily cap rates averaged 6%, a two basis-point increase from Q3 and 40 basis points above the all-multifamily cap rate of 5.6%. They’ve stayed around this rate since the second quarter of 2024. Since the first quarter of 2023, cap rates have increased by 108 basis points.
The risk premium compressed by 32 basis points in Q4 to 168 basis points. That happened as 10-year yields averaged 4.3% between October and December last year. Also, expense ratios between underwritten property-level expenses and gross income dropped by six basis points to 41.0%. A year before, expense ratios were up by 166 basis points.
Occupancy rates were up 11 basis points year-over-year to 97.5%, suggesting that extra inventory from high rates of construction may be burning off in small multifamily markets.
Source: “Small Multifamily Valuations Start to Rise Again and Originations Are Up”
