Multifamily Underwriting Assumptions Mostly Unchanged in Q4

Underwriting assumptions for both core and value-add multifamily assets were mostly unchanged in Q4. The only substantial movement was an increase in the unlevered IRR target for core assets. This comes as the market awaits more clarity on policy shifts by the Trump administration and their effects on economic growth, inflation and the housing market, as well as the pace of interest rate cuts in 2025.

Figure 1: Quarter-over-Quarter Change in IRR Target & Cap Rates for Core Assets

The average core multifamily going-in cap rate remained at 4.90% in Q4, while the average exit cap rate stayed at 5.05%. Core unlevered IRR targets increased by 12 basis points (bps) to 7.76%. This matches the IRR target from Q1 but is slightly below the 7.80% peak in Q4 2023. The spread between going-in and exit cap rates for core assets remained at 15 bps in Q4. The spread is expected to increase over the next two years, with going-in cap rates compressing more than exit cap rates as the Fed continues to cut rates.

Twelve of the 18 markets tracked for CBRE’s quarterly Multifamily Underwriting Survey had stable IRR targets for core assets in Q4. Two markets (Los Angeles and Philadelphia) saw reductions in their core-asset IRR targets, while four others (Atlanta, Austin, Chicago and Washington, D.C.) had increases.

Figure 2: Buyer & Seller Sentiment for Core & Value-Add Assets

In Q4, CBRE added a new survey question to gauge both buyer and seller sentiment for core and value-add assets. Buyers held a mostly positive-to-neutral stance across product types and markets. Seller sentiment was more divided, with core sellers being more neutral overall than their negative-leaning value-add counterparts. Negative seller sentiment was more pronounced in the Sun Belt for both core and value-add assets, though some Sun Belt markets (Dallas and Miami) did note positive seller sentiment for both asset types.

Figure 3: Buyer Valuation Underwriting Assumptions for Core & Value-Add Multifamily Assets

Underwriting assumptions of annual asking rent growth for core assets over the next three years improved for the second consecutive quarter, increasing to 2.7% from 2.5%. This improved outlook underscores the growing stability in multifamily fundamentals and was mostly driven by higher rent growth assumptions in Atlanta, Philadelphia and Seattle.

While value-add going-in cap rates increased by 5 bps to 5.24%, all other underwriting metrics saw slight improvement in Q4. Exit cap rates fell by 5 bps to 5.38%. The spread between going-in and exit cap rates (14 bps) for value-add assets was on par with that of core assets (15 bps). Unlevered IRR targets for value-add assets fell by 5 bps to 9.96%.

Figure 4: Underwriting Assumptions for Core & Value-Add Multifamily Assets by Market, Q4 2024

Five markets saw going-in cap rate compression for core assets (Boston, Los Angeles, Philadelphia, San Francisco and Seattle), while five others (Atlanta, Austin, Charlotte, Chicago and Washinton, D.C.) saw slight increases. No markets saw movements of more than 25 bps in either direction. For value-add assets, two markets (Boston and Dallas) had lower going-in cap rates in Q4 than in Q3, while nine had slightly higher rates.

Although underwriting assumptions are changing more quickly in some markets, we expect less variation ahead as the market gains more clarity on the impacts of the Trump administration’s policy changes. While underwriting assumptions were relatively unchanged in Q4, preliminary pricing results from year-end 2024 and positive movement in sentiment as of mid-January represent tailwinds for the multifamily sector heading into 2025.