Apparently while interest rates have managed to move faster than cap rates. Trepp did a recent series of multifamily sales. The implied cap rates "continued to hover at just under 4% of 2021" in September.
"Since the run-up in interest rates over the last six months, Trepp analysts have been keeping an eye on cap rates to see if they have kept pace with the run-up in Treasury yields since February," the firm said. "The short answer is that while cap rates have climbed, the increase has been a fraction of the increase in Treasury yields."
Trepp looked for sales of properties that have loans from the likes of government-sponsored enterprises like Fannie Mae and Freddie Mac. The people doing the analysis then looked at the most recent full-year net operating income for an implied cap rate.
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"The task is challenging due to the cyclical nature of NOI reporting," the firms added. "For a sale that took place, for example, in January 2022, the most recent full-year NOI reported would be for 2020. That is because most NOI numbers are not reported until two or three months following year-end."
In other words, the NOI figures can be upwards of a year old at that point, which helps explain why the NOI has remained largely flat. As part of this, higher interest rates won't directly affect building fundamentals unless they're facing refinancing and haven't yet had to incorporate the increases. Using a rule-of-thumb and an assumption that refinancing becomes necessary roughly on a five-year cycle, about 20% of properties will need new loans on any given year, and those will be spread throughout.
Inflation, too, won't be a factor as costs from 2021 didn't feel the full pinch of what has been happening this year.
That helps explain the Trepp observation that "cap rates have moved up modestly since July, but have yet to crack 4% on a weighted average basis. (To be sure, some properties are selling at cap rate to NOIs of 4.5% or more. But on average, the numbers in slightly less than 4%.)"
Instead of looking to the past, Trepp suggests adjusting cap rates based on an assumed growth rate.
"To see how the adjustment works in practice, let's assume that a property transacted in August 2022 for $3,000,000 and the "true" (unobserved) cap rate is 3.75%," the firm wrote. Since NOI is the product of price times cap, you would take a past full-year NOI, adjust it by NOI growth, and then use that to calculate the cap rate.
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