Prime Multifamily Metrics Tick Upward for First Time in Two Years

Article originally posted on HERE on April 16, 2024

Multifamily metrics including going-in cap rates, exit cap rates and unlevered IRR targets for prime assets showed slight improvement in the first quarter, the first such uptick since the Federal Reserve began raising interest rates in early 2022, CBRE reported.

The positive spread between going-in and exit cap rates stabilized at 12 basis points in Q1 after declining for eight consecutive quarters. This suggests that the positive spread will likely continue unless there are unexpected economic deteriorations, according to CBRE.

Unlevered IRR targets decreased by nine bps in Q1 to 7.59%. Most prime multifamily markets tracked by CBRE had stable or lower IRR targets, with Denver and Los Angeles experiencing the biggest reduction

“We are observing notable improvements in underwriting metrics for prime multifamily assets, marking the first improvement seen in two years,” said Matt Vance, head of multifamily research for the Americas at CBRE. “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,” Vance added. “It is crucial for investors to closely monitor these positive developments as they navigate the multifamily market.”