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Multifamily Minute Reader Reflections: Where Cap Rates Are Headed in 2024
We asked our subscribers where they feel cap rates for multifamily properties will head as we move through 2024. Here's what they said.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!Cap rates are kind of a funny thing.
You can use them to assess returns on many different kinds of investments, but they get a whole lot of focus in the multifamily (and other commercial real estate) world.
The reason? It's a fairly simple calculation that can be useful for comparing different investment opportunities to identify better returns (and the levels of risk).
They're useful, yes — but they also have some shortcomings you shouldn't ignore. For example:
- They don't account for future changes (e.g., if you raise rents, your costs go up, or your property value swings significantly)
- They ignore financing costs (which can massively affect profitability)
- They don't provide a window into operations
Still, they can be useful as a tool for evaluating an investment in tandem with other measures. (Site note: We've got a great cap rate calculator you can use, if you're interested in playing around with it.)
Survey Results
When asked where they expect multifamily cap rates to go this year, our subscribers gave the following responses:
Where are cap rates headed in 2024? | Percent of respondents |
|---|---|
Significantly increase (by 1% or more) | 18% |
Moderately increase (0.5% to 1%) | 34% |
Remain stable (less than 0.5% change) | 25% |
Moderately decrease (0.5% to 1%) | 16% |
Significantly decrease (by 1% or more) | 7% |
More than half of our respondents said they expect to see cap rates increase this year.
What does that mean for you as an investor?
Increasing cap rates is one sign of a cooling market. It makes sense, as lower property values means higher cap rates (provided property income stays roughly the same).
But, it also signals increased risks in the multifamily sector. That shouldn't be any surprise, given the challenges we're seeing. I'm not only referring to potential oversupply issues thanks to the massive development pipeline, but also sustained higher interest rates and general uncertainty in many markets.
My hope, of course, is that the Fed will begin cutting rates before long. Historically, when rates have dropped, so too have cap rates.
Should that happen, I suspect we'll see capitalization rates slightly increased from where they are right now, and 2025 could see them begin to compress once again.
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