Multifamily Metrics Show Positive Shift Following Fed Rate Cut, CBRE Reports

Article originally posted on Multifamily Executive on November 1, 2024

Metrics for both core and value-add multifamily assets improved across the board after the Federal Reserve’s rate cut in September—the first in two years. According to CBRE’s Multifamily Underwriting Survey for the third quarter, these improvements signal the market is on the road to value recovery.

“The data for this report was collected in late September/early October and is reflective of the most recent Fed rate cut in September. Despite the recent fluctuations in interest rates, current market conditions appear stable,” said Matt Vance, Americas head of multifamily research for CBRE. “While it is difficult to say how cap rates and asset pricing may respond to continued interest rate volatility this year, there are certain multifamily product types and geographies that will be more and less susceptible to changes in interest rates, borrowing costs, and the resulting supply and demand of investment activity.”

Both the average core multifamily going-in and exit cap rates decreased in the third quarter, falling by 5 basis points (bps) to 4.9% and 7 bps to 5.05%, respectively. Even as both cap rates compressed, the spread between the two also decreased slightly to 15 bps. According to CBRE, the spread, which is still higher than its low of 12 bps in 2023’s fourth quarter, is expected to increase over the next two years as the going-in cap rates compress more than exit cap rates and the Fed continues its rate cuts.

Annual asking rent growth assumptions for core assets over the next three years increased for the first time since 2021. After declining to 2.1% in the second quarter from the all-time high of 4.5% in 2021’s fourth quarter, rent growth projections increased to 2.5%.

“This improved outlook underscores the growing stability in multifamily fundamentals and was mostly driven by rent growth assumption improvements for Charlotte, North Carolina; Dallas; and Denver,” stated the report.

Out of the 19 markets tracked, nine saw going-in cap rate compression for core assets; Austin, Texas; Chicago; Denver; Indianapolis; and New York saw decreases of 25 bps or more. Los Angeles was the only market with an increase in going-in cap rates for core markets, which is down from the five markets that saw increases in the second quarter.

CBRE noted that multifamily value-add assets saw the biggest underwriting improvements for the quarter. Both going-in and exit cap rates decreased by 13 bps to 5.19% and 5.43%, respectively. The spread between the two came in greater than core assets at 24 bps.

For value-add assets, nine markets had lower going-in cap rates; however, no markets reported higher going-in cap rates.