Multifamily Cap Rate Spread Smallest Since 2014

The average prime multifamily cap rate has risen by 155 basis points to 4.92% since Q1 2022, according to a new analysis from CBRE. That is 70 bps higher than the pre-pandemic 2018-2019 average.

“Underwriting assumptions for prime multifamily assets are likely nearing their peak,” CBRE predicted, “though some additional expansion is likely” if the Fed raises rates again or long-term rates continue to climb.

“The spread between going-in and exit cap rates fell to 15 bps at the end of Q3 – the smallest spread since CBRE began a quarterly survey of its investment professionals in 2014,” the report noted. Unless economic conditions get significantly worse, the spread is likely to remain positive in the near-term.

“However,” it added, “an inversion or parity between cap rates has occurred in some markets, such as Chicago, New York, Phoenix, Seattle and Washington, DC.”

Between Q2 2023 and Q3 there was a 19 bps increase to 4.92% in the average prime multifamily going-in cap rate. The average exit cap rate rose 12 bps to 5.07%. Both levels were the highest since January 2020. The unlevered internal rate of return target rose 29 bps to 7.51%. That created the widest spread over going-in cap rates – 259 bps — since CBRE surveys began.