A predictive model by First American Financial Corp. hints at a possible rise in cap rates based on diverse transaction volume scenarios. Xander Snyder, the company’s chief commercial real estate economist, recently mentioned in a blog, “Regardless of how you analyze it, there’s a strong indication that multifamily cap rates might climb further.”
If the model proves accurate, it signals an ongoing uptrend in cap rates. This trend primarily stems from the limited instances of multifamily properties transitioning between investors.
Snyder notes that the current slowdown in property sales comes post the transactional surge during the pandemic. Furthermore, it still falls short compared to the numbers observed before the pandemic hit. Given the looming economic uncertainties, forecasting the multifamily sector’s trajectory in the upcoming months remains a challenge.
The Multifamily Potential Cap Rate model from First American speculates potential cap rates under various transactional circumstances. As an illustration, should the deal volumes bounce back to their pre-pandemic norms and sustain for a few quarters, the model predicts a cap rate of 5.1%. This is a jump from 4.9% seen in the recent second quarter. A plunge into a recession, however, could raise this cap rate to an even higher 5.6%. Such a downturn would inevitably tighten credit availability, lessen lease demands, and tilt investors towards more secure assets, warns the economist from First American.
On the other hand, if the transactional volumes hover around the numbers seen in the second quarter, which was 34% less than pre-pandemic figures, and maintain this for an extended period, the model foresees a cap rate rise to 5.6% in the absence of a recession. Factor in an economic slump, and this could touch 5.9%.
In the model’s most pessimistic projection, cap rates could see a surge of a full percentage point. But, if transactions find their footing at pre-pandemic rates and maintain stability, the hike might be a mere 20 basis points. Nonetheless, First American’s comprehensive analysis foresees an inevitable rise in cap rates in the future.
Alternative Cap Rate Forecasts
According to CBRE-EA’s primary multifamily cap rate prediction, while a peak of 5.3 percent is expected in 2023, it’s set to drop to 5.0 percent by the close of 2024. However, a more pessimistic view suggests cap rates may reach a high of 6.2 percent in early 2024, only to drop slightly to 6.0 percent by the end of the same year. Meanwhile, Fannie Mae’s less optimistic projection foresees multifamily cap rates peaking at 5.7 percent within this year, then settling at 5.5 percent as 2024 concludes.