Multifamily Core and Value-Add Metrics Outperform Expectations

The have improved across the board.

Much news about multifamily has been about the difficulties in the asset class. A new report from CBRE Research raises an interesting comparison to the office segment — a differentiation in performance by property subclass.

CBRE said that metrics for both core and value-add multifamily “improved across the board” after the Federal Reserve cut the federal funds rate by 50 basis points in mid-September. Without more details, that has to be taken on some faith as it left very little time in the quarter, which ended September 30, to show an improvement after the fact. Investors, buyers, and sellers could also have been anticipating the reduction.

Whatever the ultimate causation, the two classes did measurably better, which CBRE said meant the market — at least those parts — had finally made it past “protracted stabilization” and was “on the road to value recovery.”

Average core multifamily saw the going-in cap rate drop from 4.95% to 4.90%; the exit cap rate fell from 5.12% to 5.07%. Core unlevered internal return rate targets “fell substantially” to 7.64% from 7.73%. Out of the 19 markets examined for the report, 10 had stable IRR targets for core assets in Q3. Six — Atlanta; Chicago; Denver; Nashville; Seattle; and Washington, D.C. — saw IRR targets drop by 25 basis points. Los Angeles, Philadelphia, and Tampa were the only three markets in the group with IRR target increases. The average was 7.64%. The average spread between going-in (4.90%) and exit (5.05%) cap rates for core assets fell to 15 basis points. Rent growth underwriting for the first three years was 2.4%.

The average value-added multifamily going-in cap rate went from 5.32% in Q2 to 5.19% in Q3. The exit cap rate slid from 5.56% in Q3 to 5.43%. The spread between going-in and exit cap rate for value-add was 24 basis points, compared to core’s 15 basis points. Unlevered IRRs slid 20 basis points from 10.21% to 10.01%. Nine markets had lower going-in cap rates in Q3 for value-ads; none had higher rates.

“Although underwriting assumptions are changing more quickly in some markets than others, we expect less variation ahead as borrowing costs and cap rates trend down in response to the Fed’s rate-cutting cycle,” it wrote.