US Prime Multifamily Assets Rally in Q1 2024 with Improved Cap Rates & IRR Targets

Recent research by CBRE shows a positive shift in prime multifamily assets' key metrics in Q1, 2024. This marks the first improvement since the Federal Reserve began raising interest rates in early 2022.

Stabilization of Gap Between Cap Rates

The gap between going-in and exit cap rates, which had been narrowing consistently, stabilized at 12 basis points in Q1. This stability is expected to continue barring a significant economic downturn.

Market Variances in Cap Rates

While the overall average exit cap rate for prime multifamily assets is expected to stay above the going-in rate, some markets like Chicago, Washington, D.C., and Philadelphia have seen cap rates invert. However, markets like Phoenix and Seattle have returned to a positive spread after achieving cap-rate parity.

Decreases in Cap Rates and IRR Targets

Both going-in and exit cap rates saw slight decreases in Q1, falling to 5.00% and 5.12%, respectively. Unlevered IRR targets also dropped by 9 bps to 7.59%. Most prime multifamily markets, except for Chicago and Philadelphia, showed stable or reduced IRR targets.

Regional Variances and Risk Assessment

Austin maintains 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.

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 were noted in Chicago, Miami, and Philadelphia. For exit cap rates, twelve markets showed no movement, but slight decreases were observed in Chicago, Denver, and Los Angeles.

Expert Insights and Market Outlook

Matt Vance, Head of Multifamily Research for the Americas at CBRE, highlights the significant improvements in underwriting metrics for prime multifamily assets. He suggests that these positive trends indicate a potential turning point in the market, with the anticipation of future rate cuts. Vance emphasizes the importance for investors to closely monitor these developments as they navigate the multifamily market.