Tracking Multifamily’s Ever-Widening Spreads

(Mark Your Calendars: RealShare APARTMENTS EAST, February 15 in Washington, DC)

WASHINGTON, DC-By all measures, 2011 was a good year to be in multifamily in the DC area. A total of $4.7 billion in transactions in this asset class closed, effectively returning the region to the halcyon days of 2006 and 2007.

Scratch a little beneath the surface, though, and a slightly different headline emerges—although one that doesn’t necessarily suggest there is a dark side to this growth.

Rather, says William S. Roohan, vice chairman of CBRE and head of the company’s Multi-Housing Investment Properties team, the latest figures about the DC area’s multifamily market show a widening spread of cap rates between class A, B and C assets.

“We all know the market is doing great,” he tells GlobeSt.com. “The latest data is clarifying the continued spread between classes.” Class A properties current have cap rates in the 3-and-one-eight to four-and-three quarter range, he says. Class B cap rates are coming in between five and six and class C between seven and ten.

Widening spreads do not suggest overpricing, Roohan says. “It is not that a B property in Frederick would have traded at a seven and a quarter eighteen months ago--it is just that sellers weren’t willing to accept it then,” he says.

Besides a closing bid-ask spread, the cost of capital is also playing a role in cap rates, Ari Firoozabadi of Marcus & Millichap tells GlobeSt.com. Capital costs for stabilized, or class A assets, is typically pegged at the 10 year T-Bill, and that is a big reason why cap rates for these assets are in the 4% to 4.5% range, he says.

“The cost of capital for value add deals is typically price against LIBOR plus the lender spread for acquisition and rehab loans,” he says. “LIBOR continues at historically low levels and lenders are competing for the opportunities, resulting in continued lender low spreads.”