Finance  ·  Analysis

The Rise in Multifamily Cap Rates Is Slowing, New Data Suggests

But how good is that news for a jittery market?


Multifamily investors can expect good things in 2023 if cap rates foretell the future. 

A new report from CBRE (CBRE) found that cap rates for Class A multifamily properties experienced their first significant quarterly deceleration since the Federal Reserve began raising interest rates last March, suggesting the asset class could be less risky for investors going forward. 

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The average going-in cap rate — i.e. the first-year yield on a real estate investment – increased by only 23 basis points in first quarter 2022. The three preceding quarters saw average going-in cap rate increases of 39, 36 and 38 basis points, respectively, following the trend of multiple interest rate hikes by the Fed. 

Cap rates typically rise and fall in concert with interest rates; lower cap rates suggest lower interest rates, cheaper leverage, higher prices for property and thus greater values, while higher cap rates suggest the inverse: high risk, low prices and low values on those assets. 

“We feel more optimistic about the future compared to today,” said Matt Vance, head of multifamily research for CBRE Americas. “The fact that cap rate increases have decelerated is really good news for the industry. It indicates there’s less risk today and the future will look better than it does now.”  

The spread between the going-in cap rate and exit cap rate (the yield in the final year of ownership of a real estate investment) also shrank, falling from 36 basis points in fourth quarter 2022 to 27 basis points in first quarter 2023. That spread stood at 78 basis points in the fourth quarter of 2021. 

“When investors and underwriters look further into the future, they’re willing to place a pretty healthy bet that it won’t be worse than where it is today—which is why the spread [between the two] is 27 basis points and is the lowest it’s been since we’ve been tracking this,” said Vance.   

When exit cap rates are lower than entry cap rates, this usually means the property’s value has increased for the investor. 

The CBRE report found that unlevered internal rate of return targets (an investment’s annual growth rate minus financing) and rent growth all slowed down in first quarter 2023, as well, suggesting further stabilization of the asset class.  

The cap rate deceleration for multifamily properties is tied to larger macroeconomic fundamentals, explained Vance, who highlighted the combination of the overall inflation rate stabilizing around 5 percent and the Fed’s increased transparency on the likelihood of future interest rate hikes.  

“[The Fed’s] been pretty transparent and consistent with their posturing,” he said. “So we expect an additional interest rate hike in May, but we don’t necessarily expect additional interest rate hikes later in the year.” 

But not all economists are buying the rosy outlook from CBRE’s research. 

“One quarter does not make a trend,” said Christopher Thornberg, founding partner of Beacon Economics

“Take that interpretation [of data] with a giant grain of salt,” he added. “Maybe it is the answer, but we’re dealing with low liquidity, not a lot of sales, and cap rates have traditionally been really hard to measure.” 

Thornberg said that cap rates are always “a rough speculation” on what investors can yield because of the uncertainty baked into pricing multifamily properties that comes from expenses like utilities, insurance and repairs. 

“Cap rates are at best a rough approximation,” he said. “Estimates can vary pretty widely from property to property in a rough market.”  

Thornberg also cautioned about feeling optimistic regarding the residential real estate market due to the amount of liquidity the Fed pumped into the system over the last three years. He said property values are still too high and are not going down. 

“We saw a 40 percent increase in the money supply,” he said.  “When something like that happens you have asset price inflation. This is a known monetary theory: you see inflation and an asset price bubble.”

Brian Pascus can be reached at