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A new report from CBRE Research shows that multifamily investors are reacting to the heightened market volatility and higher borrowing costs by pushing cap rates up 75 basis points over six months. Going-in cap rates for prime multifamily assets increased 33 basis points to 4.09% in the third quarter, which was slightly more modest than the 39 basis points in the second quarter—the largest dating back to 2014.

However, according to CBRE, cap rates have risen from record lows in the first quarter and are slightly below the 4.16% seen in the fourth quarter of 2019.

For the next three years, investors are underwriting 3.6% annual rent growth, which is down from the 4.3% forecast in the first quarter. But it’s still more than the 3.1% average seen between 2014 and 2019. CBRE also noted that investors are more optimistic about the nation’s gateway markets, which is a reversal from six months ago when anticipated rent growth in those metros still lagged behind the average of other markets.

Exit cap rates increased more slowly, rising 21 basis points in the third quarter compared with 30 in the second quarter, but, at 4.63%, they still remain below pre-pandemic levels. According to CBRE, internal rate of return targets increased 35 basis points to 6.39%, which also surpasses the pre-pandemic average. Average asking rent for the third quarter was relatively flat, rising 2 cents to $4.45 per square foot.

The more conservative underwriting has not been stopping transactions. The second quarter investment volume for prime and Class A mid- and high-rise assets increased 42% year over year. These assets accounted for 34.6% of total U.S. multifamily investment volume over the four quarters ending in the second quarter, which is in line with the historical average, stated CBRE. Garden-style assets, comprising the rest of the multifamily market, increased by 26.5% year over year during the second quarter.

“Multifamily investors are being selective in their acquisition decisions in the current environment,” said Matt Vance, Americas head of multifamily research for CBRE. “While a bid/ask price gap exists for many assets, transactions are continuing to close. This reflects buyers’ long-term confidence and sellers’ willingness to lower pricing modestly in light of the significant embedded gains in asses purchased over the past several years.”

Looking at markets specifically, the going-in cap rates remained flat in Dallas, New York, and Philadelphia in the third quarter but increased in all other markets. According to CBRE, pricing has held up better in gateway markets, where cap rates have risen 58 basis points in six months. However, this is well below the 82-basis-point average for all other markets. The spread in cap rates for gateway markets versus all other markets, 19 basis points, is still less than half of what it was in the first quarter, 44 basis points, when peak pricing was seen.