Prime Multifamily Metrics Hold Steady in Q2

Going-in cap rates, exit cap rates and unlevered internal rate of return (IRR) targets for prime multifamily assets were essentially unchanged for a second consecutive quarter in Q2, likely due to expectations that the Fed will begin cutting interest rates later this year. This stabilization follows quarterly increases in all three metrics due to rising interest rates beginning in early 2022.

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

The spread between going-in and exit cap rates decreased slightly to 11 basis points (bps) in Q2. The average prime multifamily going-in cap rate fell by 4 bps in Q2 to 4.97%, while the average exit cap rate fell by 5 bps to 5.08%.

The narrower spread between going-in and exit cap rates resumed a downward trend that lasted for eight consecutive quarters from Q4 2021 to Q4 2023. The overall average exit cap rate for prime multifamily assets is not expected to fall below the going-in rate before pricing recovery begins in earnest.

Figure 2: Going-In & Exit Cap Rate Spreads

On a market-by-market basis, cap rates have remained inverted (exit cap rates lower than going-in cap rates) in Chicago since Q4 2022 and in Washington, D.C. since Q3 2023. Philadelphia, which previously had been inverted, reached cap rate parity in Q2, while Austin and Denver’s spread fell to parity.

Underwriting assumptions of annual asking rent growth over the next three years decreased slightly to 2.2%.

Unlevered IRR targets increased slightly in Q2 to 7.63%. All but three (Atlanta, Chicago and Seattle) of the 15 multifamily markets tracked for this report had either stable or slightly higher IRR targets in Q2. Phoenix (-25 bps) and Washington, D.C. (-13 bps) were the only markets with reductions.

Figure 3: Buyer Valuation Underwriting Assumptions for Prime Class A Multifamily Assets

For the 11th consecutive quarter, Austin had the lowest risk requirements on an underwriting basis. Most markets remained unchanged quarter-over-quarter, with only Washington, D.C., Phoenix and Dallas moving slightly up the list from underwriting metric improvements or from downgrades of other markets.

Figure 4: Buyer Valuation Underwriting Assumptions for Prime Class A Multifamily Assets by Market, Q2 2024

Five markets (Boston, Los Angeles, Miami, Philadelphia and Phoenix) had moderate going-in cap rate decreases in Q2, while seven had no change. Going-in cap rates increased 25 bps or less in three markets (Austin, Denver and Seattle). Exit caps were unchanged in 11 markets, while Boston, Miami and Phoenix had slight decreases. Dallas was the only market with an exit cap rate increase, up by 13 bps.