Big Metro Multifamily Participants Most Optimistic About Cap Rates

There’s been a lot of multifamily distress that has become obvious. Heated development in many metros, typically in the Sun Belt, has resulted in more inventory than expected, increased vacancy rates, and declining rents. Then increased costs of operations have driven down net operating income.

But, as always, averages are deceptive, and different parts of the country see markedly dissimilar conditions. CBRE’s biannual cap rate survey for multifamily asked market participants to forecast cap rates over the next six months.

The report provides two big takeaways. One, most respondents expect cap rates to at least remain flat or to decline somewhat, suggesting a market turning around or, as the report put it, the response might suggest an “inflection point.”

Second, as sentiment varies by geographic region, as often happens, the most optimistic sit in top gateway markets. Across New York, Boston, Washington, D.C., Los Angeles, San Francisco, and Seattle, a percentage of the respondents in the upper 80s expected a decline in cap rates. But the average of all infill markets was about 39%. Infill markets in high-growth Sunbelt areas were the least optimistic at about 9%.

Suburban markets showed a similar distribution, although nowhere near as high as the infill gateway. Suburban gateway markets were at 50%. Across all suburban markets, about 43% or 44% expected a drop in cap rates. High-growth Sunbelt suburban markets only reached about 18% being optimistic.

The major difference between the gateway and Sunbelt markets is, as GlobeSt.com has frequently reported, the latter’s multifamily construction boom. The phenomenon started several years ago as demographic changes and business movements brought more people to warmer climates in the South. Of course, developers would follow. People who moved for greater job opportunities and perceived lower costs of living needed places to live. Developers saw a growing market and seized the opportunity.

Eventually, momentum continued the pace of development, with 2023 providing a record amount of delivery and 2024 on pace to do even more.

In June 2024, private-owned housing completions had increased sequentially by 10.4% to a seasonally adjusted annual rate of 1.71 million units, according to Moody’s. That includes both single-family and five-or-more-unit multi-family. The latter represented the bulk of the construction at 656,000 units. That was an increase of 26.2% month-over-month or 40.2% year-over-year. That’s the highest seasonally adjusted rate since September 1974.

Even now, Freddie Mac multifamily research senior director Sara Hoffmann recently told GlobeSt.com that the defining sentiment for the overall market is “slow but steady.” Headwinds aren’t strong enough to eradicate the industry’s fundamentals, but the disparity between levels of development has shifted excess inventory to the south and west. It will take some time for the excess inventory to dissipate.