Are Multifamily Cap Rates Too Low? It's All Relative. - Cap Rates - Multifamily Executive Magazine

The swift pace of cap rate compression over the past year continues to frustrate investors and delight sellers.

The rapid increase in rent growth and values in many markets—combined with historically low mortgage rates—has inspired more listings, as well as bidding wars.

Investors grumble that high-barrier-to-entry coastal markets such as Los Angeles, Washington, D.C., and New York, where cap rates can sit in the 4 percent range, have grown much too frothy. At sub-5 percent cap rates, the math an investor needs to make that investment a long-term win is pretty aggressive in terms of NOI growth.

Yet the multifamily sector continues to benefit from a lack of viable investment alternatives. The stock market continues its schizophrenic pace, and 10-year Treasury bonds are yielding around 2 percent. In short, where else can investors put their money to achieve the same kind of stable returns?

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