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NREI: Multifamily investors are still okay with low cap rates, but that could change soon

Current conditions could put an end to the bidding wars raging over multifamily properties

Despite major activity in the multifamily property purchase market, capitalization rates have remained largely unchanged since 2017.

According to National Real Estate Investor’s analysis of Real Capital Analytics data, cap rates on apartment acquisitions have averaged 5.6% since 2017 with very little variance to date.

One of the major reasons behind the cemented cap rates is an abundance of eager investors paying record prices for multifamily properties is putting a ceiling on cap rates.

New buyers keep cropping up, and if one investor is unwilling to pay a high price on a property, more likely than not, someone else will. Investor demand for multifamily family properties is very high at the moment.

Part of the reason these buyers are willing to pay such high prices for multifamily properties is the impressive rent growth the asset class has displayed over the past few years. Investors are willing to stomach a less than ideal cap rate if future rent growth looks robust.

But therein lies the crack in the multifamily armor; rent growth just went flat for the first time in six years back in August, and the rate of growth has been tapering off this year.

This could lead to the end of the bidding wars over multifamily properties and take some of the heat out of the acquisition market.

“When rent growth expectations are high, a lower initial yield is acceptable, but as rent growth expectations shrink, partially because of large amounts of supply under construction, partly because of relatively weak wage growth, going-in yields [cap rates] should rise,” CoStar Senior Consultant Andrew Rybczynski told NREI.

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