The Case for Lower Multifamily Cap Rates via NREI Readers Write

Attend any number of multifamily conferences around the Tri-State region and cap rates are sure to be a topic of discussion. But while many suggest that cap rates for multifamily rental properties will flatten in the future or even rise, I would argue that they can (and likely will) go lower. There are number of factors driving this compression, including a healthy amount of cash that is ready to return to the market; record low interest rates; and a desire among both Generation Y consumers and the Baby Boomer generation (some 76 million strong) to forgo homeownership in favor of renting. But what’s arguably most important to the cap rate debate will be the fate of the home mortgage interest deduction.

First, let’s follow the cash flow. There is a strong stable of Real Estate Investment Trusts that have large amounts of cash they are looking to deploy, and multifamily is currently the most stable asset class available. In September, the Multifamily Production Index (MPI), released by the National Association of Home Builders (NAHB), improved for the eighth consecutive quarter with an index level of 54. It is the highest reading since the second quarter of 2005. The MPI, which measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, rose from 51 in the first quarter to 54 in the second quarter.

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