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The apartment sector has emerged relatively unscathed from the early summer’s shift in the interest rate environment. Based on mortgages of $1 million or more originated during the third quarter, multifamily cap rates were up less than 20 basis points. The bulk of the increase in the long-term risk-free yield, which exceeded 100 basis points, was absorbed into spreads.

Two qualifiers accompany the result. Smaller assets have seen cap rates increase as appreciation has lagged improvements in net operating income. These properties are invariably smaller, privately owned, and more likely to be in secondary or tertiary markets. Competition from well-heeled institutional investors is absent from this segment of the market, as is the resulting price pressure. Irrespective of property size and location, the next 100 basis point shift in the interest rate environment will not be so easily digested. Weakly contested assets and properties with moderating income growth trends will prove the most susceptible to higher required yields, both in terms of cap rates and mortgage financing costs. 

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