Are Multifamily Cap Rates Too Low?

Multifamily Executive has an interesting piece that asks the question, “Are multifamily cap rates too low?”  In short the answer is it’s all relative:

Investors grumble that high-barrier-to-entry coastal markets such as Los Angeles, Washington, D.C., and New York, where cap rates can sit in the 4 percent range, have grown much too frothy. At sub-5 percent cap rates, the math an investor needs to make that investment a long-term win is pretty aggressive in terms of NOI growth.

Yet the multifamily sector continues to benefit from a lack of viable investment alternatives. The stock market continues its schizophrenic pace, and 10-year Treasury bonds are yielding around 2 percent. In short, where else can investors put their money to achieve the same kind of stable returns?..

But it’s a delicate balancing act, a window of opportunity. Capital is still looking for a home because other markets haven’t yet recovered. Multifamily owners certainly hope the job market recovers quickly, since it’s the primary driver of fundamentals. Yet, if you’re still looking for capital, or looking to sell, you may not want the broader economy to recover too quickly.

“We need job growth, but the other end of the sword is, when jobs increase, you might see inflation, interest rate movement, and less people interested in buying apartments because there are other options,” Ravin says. “If you’re just starting to build or are looking for capital, you’re sort of hoping that the capital remains in multifamily long enough for you to capture it.”