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For the first time since the Federal Reserve started raising interest rates in March 2022, going-in cap rates, exit cap rates, and unlevered internal rate of return (IRR) targets for prime multifamily assets improved slightly in the first quarter.

According to CBRE Research, after declining for eight consecutive quarters, the positive spread between going-in and exit cap rates stabilized at 12 basis points in the first quarter. The data indicates the positive spread is likely to continue if economic conditions do not unexpectedly worsen.

“We are observing notable improvements in underwriting metrics for prime multifamily assets, marking the first improvement seen in two years,” said Matt Vance, head of multifamily research for the Americas at CBRE. “This indicates a potential turning point in the market, with going-in and exit cap rates, along with the stabilized positive spread, showing positive trends.”

According to Vance, these developments suggest key underwriting metrics may have reached their peak as potential rate cuts could be on the horizon. “It is crucial for investors to closely monitor these positive developments as they navigate the multifamily market,” he added.

The overall average exit cap rate is not expected to fall below the going-in rate in the near term. However, cap rates have inverted on a market-by-market basis, including Chicago; Washington, D.C.; and Philadelphia. Previously reaching cap-rate parity, Phoenix and Seattle returned to a positive spread in the first quarter; however, cap-rate parity continued in New York and San Francisco.

The average going-in and exit cap rates for prime multifamily assets decreased by 6 basis points in the first quarter to 5% and 5.12%, respectively, after several quarters of slowing growth, according to CBRE. In addition, underwriting assumptions of annual asking rent growth for the next three years inched down to 2.3% in the last quarter.

Unlevered IRR targets also dropped 9 basis points to 7.59% in the first quarter. Of the 15 prime multifamily markets that CBRE tracks, all but two had either stable or lower IRR targets, with Denver and Los Angeles seeing the biggest reductions.

Austin, Texas, had the lowest risk requirements on an underwriting basis for the 10th consecutive quarter. According to CBRE, most markets remained unchanged; however, Los Angeles and Phoenix moved slightly up the list because of improved underwriting metrics.

Four markets—Denver, Los Angeles, Phoenix, and Seattle—experienced moderate going-in cap rate declines in the first quarter, while eight had no change. Chicago, Miami, and Philadelphia had going-in cap rates increase by less than 25 basis points. For exit caps, 12 markets were unchanged, while Chicago, Denver, and Los Angeles had slight decreases.