The multifamily market is showing signs of stabilization and recovery, especially after the first Federal Reserve rate cut in two years, which occurred in September 2024. This marks a significant shift as both core (formerly called “prime”) and value-add properties have experienced improved metrics in the third quarter of 2024. With the inclusion of four new markets—Charlotte, Indianapolis, Nashville, and Tampa—there’s now a broader view of the multifamily sector, particularly in the Southeast and Midwest regions. Here’s what this latest data means for multifamily investors and brokers.
Core Assets: Gradual Improvement Amid Fed Rate Cuts
Core multifamily assets have seen a modest yet positive change in key metrics. The average going-in capitalization (cap) rate decreased by 5 basis points (bps) to 4.90%, and the exit cap rate dropped by 7 bps to 5.05%. This slight compression indicates a more favorable investment environment for prime properties. Additionally, the unlevered Internal Rate of Return (IRR) target for core assets significantly decreased to 7.64%.
Out of the 19 markets tracked for core assets, ten remained stable in terms of IRR targets in Q3. However, six markets (Atlanta, Chicago, Denver, Nashville, Seattle, and Washington, D.C.) reported reductions in their IRR targets by 25 bps or more. The main takeaway here is that while there’s still some fluctuation, these metrics suggest a move towards value recovery after a prolonged period of market stabilization.
Value-Add Assets: Stronger Underwriting Improvements
Value-add assets, on the other hand, saw the most pronounced improvements in underwriting assumptions in Q3. Both going-in and exit cap rates for value-add properties fell by 13 bps to 5.19% and 5.43%, respectively. Notably, the spread between going-in and exit cap rates for value-add assets (24 bps) is larger than that for core assets (15 bps), indicating greater investor interest in opportunities to improve or reposition assets.
The unlevered IRR targets for value-add properties also decreased by 20 bps to 10.01%, reflecting an environment where investors are becoming more confident in underwriting for assets that require repositioning or renovation. These trends show a growing preference for assets where investors can add value, suggesting a shift toward more opportunistic strategies in the multifamily sector.
Regional Insights: Market Variations and Forecast
Across various U.S. markets, core assets showed more consistency, with nine markets (including Austin, Chicago, Denver, Indianapolis, and New York) seeing cap rate compression of 25 bps or more. However, Los Angeles was the only market that saw an increase in going-in cap rates for core assets (+50 bps). For value-add properties, nine markets reported a decrease in going-in cap rates, with none seeing an increase.
As the Fed continues its rate-cutting cycle, borrowing costs and cap rates are expected to trend lower, resulting in more consistent underwriting assumptions across markets.
Why These Trends Matter for Multifamily Investors
The stabilization of the multifamily market combined with improvements in both core and value-add properties presents a unique opportunity for investors looking to navigate the shifting landscape. As borrowing costs decrease and cap rates compress, both core and value-add assets are becoming more attractive, with value-add properties offering significant upside potential for those who are willing to take on repositioning projects.
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