MANY BUYERS AND SELLERS have been surprised at just how quickly and steeply multifamily cap rates have fallen this year.

Several factors have conspired to drive down cap rates, including a wealth of opportunity funds looking for acquisitions, lowpriced debt from Fannie Mae and Freddie Mac, and stabilizing fundamentals. But just how sustainable is this cap rate compression? Most multifamily finance professionals don't expect it to last into next year.

“It has to level off,” says Mike McRoberts, national head of production and sales for McLean, Va.-based Freddie Mac. “One thing that's going to drive cap rates is availability of product, and we've seen an increase. That has to have an upward pressure on cap rates.” In the first six months of the year, there were about 29 multifamily transactions of $10 million or more with cap rates of 6 percent or less. Yet, in the third quarter alone, there were 28 such transactions, according to New York-based market research firm Real Capital Analytics.

In the high-barrier coastal markets, there's been a return to the cap rates seen at the height of the last boom. But that's only really seen on the upper echelon of deals.

“We'll continue to see the cap rate differentiation that we hadn't seen four or five years ago,” says Michael Berman, president and CEO of Needham, Mass.-based CWCapital.

“We're seeing cap rates of 4 percent for really fine, triple A properties, but B and C properties aren't seeing that kind of compression.”