Multifamily buyer and seller sentiment improved for both core and value-add assets in the first quarter, according to new research from CBRE.
For core assets, buyer sentiment increased to 65% positive from 44% in the fourth quarter, while seller sentiment became less negative with 67% neutral sentiment versus 57% in the fourth quarter. For value-add assets, buyers only had slightly improved positive-to-neutral sentiment, while sellers saw a higher concentration of neutral sentiment. Improving sentiment was seen primarily across product types in the Sun Belt.
According to CBRE, the improvements come despite the Federal Reserve indicating a slower pace of interest rate cuts this year as it awaits more clarity on the Trump administration’s policy shifts.
Core multifamily assets saw underwriting assumptions improve in the first quarter, with metrics now in line with where they were in mid-2023. The average multifamily exit cap rate fell by 3 basis points (bps) to 5%, and core unlevered internal rate of return (IRR) targets decreased by 6 bps to 7.58%. The spread between going-in and exit cap rates increased to 19 bps in the first quarter.
“The spread is expected to increase over the next two years, with going-in cap rates compressing more than exit cap rates as the Fed continues to cut rates,” noted the report.
According to CBRE’s quarterly Multifamily Underwriting Survey, 16 of the 19 markets tracked had stable IRR targets for core assets in the first quarter. For the first time in three years, no markets saw an increase; three markets—Los Angeles, Miami, and Washington, D.C.—saw reductions in their IRR targets.
However, underwriting assumptions for value-add assets slightly weakened in the first quarter. Value-add going-in cap rates increased by 7 bps to 5.32%, and exit cap rates rose by 3 bps to 5.42%. While the spread between going-in and exit cap rates widened for core multifamily assets, it declined for the second consecutive quarter for value-add assets. Unlevered IRR targets for value-add assets bumped up 2 bps to 9.81%.
CBRE also noted that underwriting assumptions for annual asking rent growth for both core and value-add assets over the next three years remained steady at 2.7% and 3.1%, respectively. This coincides with the recovery in rent growth being seen after the record supply deliveries in many of CBRE’s tracked markets.
“Throughout the rest of this year, we expect tailwinds in the multifamily sector as investors looks to capitalize on improved market fundamentals, particularly in the core segment,” the report concluded.
