In the fourth quarter of 2023, CBRE reported that prime multifamily metrics continued to rise. Unlevered IRR targets, going-in cap rates, and exit cap rates all experienced a slight increase in Q4. This trend is expected to continue as underwriting metrics improve and lead to increased investment activity in the multifamily sector once the Federal Reserve begins cutting interest rates.
Since Q1 2022, the average going-in cap rate for prime multifamily assets has risen by 170 basis points to reach 5.06%. This surpasses pre-pandemic levels by 85 bps. According to CBRE, there is currently a positive spread between going-in and exit cap rates at only 11 bps in Q4 due to stable economic conditions. In cities like Chicago and Washington D.C., this spread has already inverted while other major markets such as New York City, Philadelphia, Phoenix San Francisco,and Seattle are approaching parity.
Matt Vance of CBRE’s Americas Multifamily Research division stated that there is a cautious market sentiment with slight increases in both cap rates and underwriting metrics for prime multifamily assets.”The rise in going-in cap rates suggests investors’ demand for higher returns,” he said.”Meanwhile,the positive spread between going-inandexitcaprates indicates overall market stability.As we anticipate an interest rate cut fromtheFederalReserveinthe near future,this could drive increased investment activityin themultifamliysectorin2024dueimprovedunderwritngmetrics.”
This article was originally published on Connect CRE.
