Underwriting Metrics Improve for Prime Multifamily

Prime multifamily metrics continued increasing in the fourth quarter of 2023, CBRE said Friday. Unlevered IRR targets, going-in cap rates and exit cap rates all experienced a slight increase in Q4. Going forward, improved underwriting metrics are expected to lead to increased multifamily investment activity in 2024 once the Federal Reserve begins cutting interest rates.

The average going-in cap rate for prime multifamily assets has increased by 170 basis points to 5.06% since Q1 2022, surpassing the pre-pandemic average by 85 bps. The spread between going-in and exit cap rates reached its lowest point at 11 bps in Q4, “indicating a positive spread as long as economic conditions remain stable,” according to CBRE. Cap rates have already inverted in Chicago and Washington, DC, with New York, Philadelphia, Phoenix, San Francisco and Seattle approaching parity.

“We are seeing a cautious market sentiment with a slight increase in cap rates and underwriting metrics for prime multifamily assets,” said Matt Vance, head of multifamily research for the Americas at CBRE . “The rise in going-in cap rates suggests investors’ demand for higher returns, while the positive spread between going-in and exit cap rates indicates overall market stability. As the Federal Reserve prepares to cut interest rates, we anticipate increased multifamily investment activity in 2024 driven by improved underwriting metrics.”

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