Small Multifamily Cap Rates Drop to 6%
The small multifamily market saw notable developments in the third quarter, with cap rates averaging 6.0%. This marks an increase of 31 basis points compared to the same period last year and a rise of 98 basis points from the cyclical low recorded in 2023. The risk premium above the 10-year Treasury yield also grew, climbing 42 basis points to 201, which reflects a return to pre-pandemic levels.
According to Arbor, Q3 represented a positive shift for the small multifamily sector, with signs of market normalization. Key factors contributing to this improvement include rate cuts by the Federal Reserve, which have helped enhance pricing, cap rates, and credit conditions. Additionally, easing interest rate pressures, strong rental demand in many markets, and strengthened lending from government-sponsored enterprises have further supported the industry.
The National Multifamily Housing Council shares a similar view, noting that markets are among the least restrictive since July 2020. Sales volume and equity financing have notably improved since October, and debt financing conditions are stronger. The CRE Finance Council also reported that 85% of those surveyed expect positive market impacts, marking the highest optimism since Q3 of 2022.
However, the market is experiencing some challenges, such as a significant increase in inventory, which has slowed rent growth and raised vacancy rates. Arbor believes the ongoing demand for affordable housing will help offset these impacts. In addition, as GlobeSt.com has noted, two factors could contribute to a rise in inventory: 1) the growth in new units is concentrated in the South and West, where demographic trends are driving development, and 2) new construction starts are expected to slow in 2025, allowing demand to catch up to supply.
Looking ahead, Arbor highlighted that futures markets predict the Federal Reserve will continue to cut rates through 2025. In a recent speech, Fed Chair Jerome Powell expressed confidence that the economy and labor market can remain strong while inflation steadily declines to 2%. He also indicated that the Fed is moving toward a more neutral policy stance, though the exact path remains uncertain.
Source: GlobeSt.
