The multifamily investment scene is buzzing, especially given the recent economic shifts.
Many investors feel we're approaching the peak of cap rates. This sentiment is driven by 2022's hyperinflation and the Federal Reserve's bold rate increases.
In the last year, U.S. cap rates have risen by about 60 basis points. But remember, this is a national average. Different markets have their own stories, and not all have seen the same cap rate changes since 2022 began.
Key Points to Consider:
- Interest Rate Stability: There are signs that interest rates are finding their balance, boosting market confidence. This reassures investors, leading to more deal-making. See Chart1 for the Fed's rate changes.
- CBRE's Take: CBRE, a top name in commercial real estate management and services, believes cap rates will grow slower than interest rates. This suggests we might be near the cap rate peak.
- Transaction Trends: After a quiet period in Q1/Q2 2023, apartment deals are picking up. There's still a gap in price expectations, but it's getting smaller.
- Ready-to-Invest Money: Both big and small investors have funds ready to go. They're keen to invest in multifamily properties. This demand could keep cap rates steady or even push them down.
- Distressed Debt Reality: Distressed debt is in the news, but it's a small part of the market. Trepp,a leading provider of information and analytics has data showing only 2% of loans from major lenders are "at-risk." Check out Figure1 for more. Plus, those with "at-risk" loans are either standing firm or talking new terms with lenders.
From where I sit, cap rates seem to have gone up, but the real-world data doesn't fully back this due to fewer transactions at these rates. Both sellers and buyers have held their ground. I see interest rates possibly easing in the next 12-18 months, making deals more attractive.
I think sellers might stay put, while buyers might adjust their profit expectations to get their money working.
Costs have gone up in areas like insurance and construction. But, jobs and incomes have also grown. The ongoing housing shortage, made worse by high building costs, means more demand and potentially higher rents.
The U.S. economy is giving mixed messages. Many predict a big downturn, but I'm still weighing things up. Right now, I'm leaning towards a stable economy, based on the data and my own business sense.
To wrap up, I see cap rates staying pretty much the same for the next 12-18 months, with potential drops after that.