After a two-year period of decline, prime multifamily metrics have shown signs of improvement in the United States. This uptick is reflected in various key indicators within the multifamily real estate sector.

Recent research from CBRE indicates that prime multifamily assets in the United States have shown a slight improvement in various key metrics during the first quarter of 2024. This marks the first improvement since early 2022, coinciding with the Federal Reserve's commencement of interest rate hikes.

The gap between going-in and exit cap rates, which had been narrowing over eight consecutive quarters, stabilized at 12 basis points (bps) in Q1. This stability is expected to persist barring a significant economic downturn. While the overall average exit cap rate remains above the going-in rate for prime multifamily assets, some markets like Chicago, Washington, D.C., and Philadelphia have already seen cap rates invert. On the other hand, markets such as Phoenix and Seattle have returned to a positive spread this quarter after previously achieving cap-rate parity.

In Q1, both going-in and exit cap rates saw a slight decrease, falling by 6 bps to 5.00% and 5.12%, respectively. Expectations for annual asking rent growth over the next three years also declined marginally to 2.3%, while unlevered IRR targets decreased by 9 bps to 7.59%. With the exception of Chicago and Philadelphia, most prime multifamily markets tracked by CBRE showed stable or reduced IRR targets, with Denver and Los Angeles experiencing the most significant reductions.

Austin remains the market with the lowest risk requirements for the 10th consecutive quarter. While most markets remained stable quarter-over-quarter, Los Angeles and Phoenix improved slightly in their rankings due to better underwriting metrics.

In terms of cap rate movements in Q1 2024, Denver, Los Angeles, Phoenix, and Seattle experienced moderate decreases in going-in cap rates, while eight markets saw no change. Minor increases of less than 25 bps occurred in Chicago, Miami, and Philadelphia. For exit cap rates, twelve markets showed no movement, but slight decreases were noted in Chicago, Denver, and Los Angeles.

Matt Vance, Head of Multifamily Research for the Americas at CBRE, noted the notable improvements in underwriting metrics for prime multifamily assets, signaling a potential turning point in the market. As the market anticipates potential rate cuts in the future, investors are advised to closely monitor these positive developments while navigating the multifamily market.

‍

Source: World Property Journal