Cap Rates Continue to Compress

MF Executive

Many multifamily buyers and sellers have been surprised at just how quickly, and how steeply, cap rates have fallen this past year.

Several factors have conspired to drive down cap rates a little more each month this year. A wealth of opportunity funds looking for acquisitions has resulted in frenzied bidding wars for Class A assets.

Low-priced debt from Fannie Mae and Freddie Mac has allowed more deals to pencil out. And stabilizing fundamentals have inspired confidence in the future value proposition.

But just how sustainable is this cap rate compression? Most multifamily finance professionals don’t expect it to last into next year, but there is no guarantee that Cap Rates could fall even further. The consensus is for a leveling off at some point in early 2011.

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, since the beginning of July—in a span of just over three months—there have been 28 such transactions, according to market research firm Real Capital Analytics.

These range from the very large—last month’s $193 million acquisition by CBRE of the Resort at Pembroke Pines in Hollywood, Fla., drew a 6 percent cap—to smaller assets, such as the $25.5 million acquisition by Trinity Property Group of the 76-unit Clay Park Towers in San Francisco, which had a 5 percent cap rate.

While some of today’s cap rates seem aggressive, when you factor in the price of debt from Fannie and Freddie—around 4 percent for a 10-year loan, and sub-4 percent for a seven-year loan—it makes sense.

But for now, interest rates continue to fall and the pace of transactions continues to rise. As usual, it’s Carpe Diem…