The big news for the small multifamily market is cap rates have averaged 6.0% for the third quarter. During the three months, the average cap rate was below its six-year high. They are up 31 basis points from the same time last year and 98 basis points above the “cyclical low point set in 2023.” The risk premium above the 10-year Treasury yield increased by 42 basis points to 201. That’s a revision to a pre-pandemic norm.
In general, Q3 was an improvement for the small multifamily market according to Arbor, moving some toward normalization. It attributed much to the rate cuts from the Federal Reserve, with pricing, cap rates, and credit conditions improving. Then there is easing interest rate pressure, strong rental demand in many if not most markets, and government-sponsored enterprises lending strengthening the industry.
The National Multifamily Housing Council largely agrees. Markets are the seventh loosest by their measure since July 2020. But sales volume and equity financing have improved significantly since October and debt financing is in a stronger position. The CRE Finance Council found that 85% of those polled expected positive impacts. That is the highest since the third quarter of 2022.
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High additions to inventory have had an impact, slowing rent growth and increasing vacancies. Arbor does think that the existing need for affordable housing will help balance off the increases. Also, as GlobeSt.com has reported, two additional forces could aid in increased inventory.
One is that the expansions are not evenly distributed across markets but more concentrated in the South and West, where developers were following demographic changes. The second is that additional starts are expected to start slowing in 2025. There is still a lot of ongoing building, but demand will catch up again.
Arbor did note that futures markets are forecasting that the Fed will continue cutting rates through 2025. Chair Jerome Powell gave a speech last week in which he said that while “confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent,” the Fed is “moving policy over time to a more neutral setting” and a path to arrive there is “not preset.”
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