The second quarter of 2024 saw stability across key metrics for prime multifamily assets, including going-in cap rates, exit cap rates, and unlevered internal rate of return (IRR) targets. This steadiness reflects optimism that the Federal Reserve may begin cutting interest rates later this year. After consistent increases driven by rate hikes since early 2022, Q2 marked the second consecutive quarter of stability in these metrics.
Key Insights from Q2 2024
Cap Rates Narrow Slightly
The spread between going-in and exit cap rates decreased marginally, narrowing to 11 basis points (bps). The average prime multifamily going-in cap rate dropped 4 bps to 4.97%, while the exit cap rate decreased 5 bps to 5.08%.
The ongoing narrowing trend, which began in Q4 2021, suggests the market is recalibrating after nearly two years of volatility. Although the spread remains inverted in certain markets like Chicago and Washington, D.C., others such as Philadelphia, Austin, and Denver have reached cap rate parity.
IRR Targets Show Slight Increase
Unlevered IRR targets ticked up slightly in Q2 to 7.63%. While most markets maintained stable IRR targets, Phoenix (-25 bps) and Washington, D.C. (-13 bps) were exceptions, reflecting a more cautious approach by buyers in these areas.
Rent Growth Expectations Decline
Annual asking rent growth projections for the next three years edged down to 2.2%. This reduction reflects tempered expectations amid economic uncertainty, but overall growth prospects remain positive.
Market-Specific Trends
Cap Rate Movements
- Markets with Decreases: Boston, Los Angeles, Miami, Philadelphia, and Phoenix experienced moderate going-in cap rate decreases.
- Stable Markets: Seven markets, including Atlanta and New York, saw no change in going-in cap rates.
- Markets with Increases: Austin, Denver, and Seattle recorded slight increases of 25 bps or less.
Exit cap rates remained unchanged in most markets, except for Boston, Miami, and Phoenix, which saw minor decreases. Dallas stood out with a modest increase of 13 bps in its exit cap rate.
Risk Requirements
Austin continued to lead as the market with the lowest underwriting risk for the 11th straight quarter. Washington, D.C., Phoenix, and Dallas showed slight improvements due to shifts in underwriting metrics or relative downgrades in other markets.
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