Freddie Mac provided its mid-year outlook today, and sees a moderating but bright multifamily market ahead.

Following its second-quarter earnings report, the government-sponsored enterprise says it has processed about $27 billion in mortgage purchases so far this year.

“And that puts us on pace to be around between $50 billion to $55 billion,” for the year, said David Brickman on a conference call. “So far, it’s been a very robust year, another record half for us. We do see some moderation in the market but continue to have an overall positive outlook.”

Steve Guggenmos, vice president of multifamily research and modeling, believes that cap rates are in a very healthy place as the industry heads toward what should be a busy transaction season going forward.

The risk premium—that spread between cap rates and the yield on the 10-year Treasury note—is as healthy as it’s been. He noted that while average cap rates decreased to 5.7% in the first quarter, they’re unlikely to be affected by any fluctuations in the 10-year Treasury

Ascierto, Jerry

“If rents are growing, that means we know properties are performing relatively well,” he said. “There’s always a chance that rates will go up or that capital starts to move away, but as long as those cash flows are there , that provides a stabilizing force …”

The 10-year Treasury is at about 1.56 today meaning that the risk premium is a healthy more than 400 basis points (bps).

“The spread during the 2000s was in the range of 275 bps, and the long-run spread is 215 bps, going back to the 1960s,” he said. “So as Treasury rates move up, there’s certainly room for cap rate spreads to compress and for prices to stay relatively stable.”

Top 10 Markets of 2017

Freddie Mac believes that rent growth will decelerate but stay high, and vacancies will tick-up but stay low, compared to historical averages through at least 2017. The culprit: supply outpacing demand in some markets. And the firm believes multifamily starts will remain high by historical standards for the rest of the year.

At the end of the second quarter, rent growth was at around 3.7%, according to Axiometrics, a dip of about 140 bps compared to the second quarter of 2015. Meanwhile, vacancies increased 10 bps year-over year, to 4.8%,

But not all markets are created equally, and in its second-half outlook, Freddie Mac provided a glimpse of just how hot the nation’s hottest markets will be. Of the 10 markets expected to see the most gross income growth next year, eight are on the west coast, and the top four usual suspects—San Francisco, Oakland, Los Angeles and Sacramento—all hail from the Golden State.

Here’s the top 10 for 2017:

Metro Rent Growth 2017

San Francisco 6.2%

Oakland 6.1%

Los Angeles 5.8%

Sacramento 5.5%

Tacoma, Wash. 5.1%

West Palm Beach, Fla. 5.0%

Chicago 5.0%

Portland, Ore. 4.9%

Seattle, Wash. 4.9%

San Diego 4.9%