Multifamily cap rates remain low through the first quarter of 2021. Read on for an update regarding the trends we are seeing so far this year and what they mean for those investing in multifamily properties.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
Cap Rates Offer Quick Comparison Between Properties
Multifamily cap rates offer a way to perform quick analysis of a building’s investment potential as compared to looking at revenue alone. The cap rate is a percentage that expresses the building’s net operating income divided by the current market value of the building. A higher cap rate may be preferred by investors, because it indicates better value for the current purchase price with greater profit opportunities. Sellers would rather see a low cap rate, which would correlate with a higher sale price and less of a ‘bargain’ for the buyer.
Learn more about how to calculate cap rates and how to use them when comparing deals in our blog post on What is a Cap Rate in Real Estate?
High Property Values Are Driving Down Cap Rates
Multifamily cap rates ended 2020 at 4.9 percent and have not received an upward boost so far in 2021. Much of this trend is attributed to the healthy real estate market demand and exceptionally low supply that is driving up the value of multifamily buildings. Continued bullish confidence in multifamily real estate does not seem to be wavering.
Fannie Mae’s Multifamily Economic and Market Commentary predicts that cap rates will remain low through 2021. Low cap rates caused by high property values mean that in many markets investors will be purchasing at the top of the market. Assessment of one’s willingness to buy high is a necessity while cap rates remain low.
Demand for Multifamily Housing Benefits Net Operating Income
Last year resulted in an increased demand for rental housing, and that trend is likely to hold. Mortgage rates may rise, single-family inventory remains exceptionally low, and first-time home buyers are increasingly priced out of the market. This steady demand for multifamily housing impacts cap rates via the net operating income projections.
Vacancy rates remain low, which is favorable for net operating income projections in the cap rate equation. Incremental increases in net operating income can create exponential increases in value in low cap rate properties.
Multifamily housing demand is projected to consistently outstrip supply based on current construction trends. This bodes wells for investors hoping to increase net operating income.
Expect Higher Cap Rates in Suburban Markets
Property location is one of the single greatest determining contributors to the cap rate. It impacts both current market value and the net operating income. Ideally situated properties can be expected to have lower vacancy rates and generate more in rent revenues than properties that are less favorably located.
Currently, large, high-demand metro areas overall have lower multifamily cap rates than suburban markets. Expect the lowest cap rates in the markets that are ever-present on the most expensive real estate lists, such as the northwest, the Bay Area, Florida, and New York City.
The suburban and smaller-metro markets, however, offer some unexpected opportunities at this time. Pandemic housing trends indicate growth and increased demand in less common places, like Boise, Idaho. Smaller urban areas such as this have lower property values compared to larger metro areas, and this leads to a higher cap rate. Net operating income remains promising thanks to high demand.
Throughout 2021, watch for migration trends to and from the largest metro areas. Throughout the pandemic, remote work and unemployment caused many to leave large cities for suburban and smaller metro areas. Should this trend continue, cap rates may shift between these areas. With the CDC’s recent vaccination guidance, many employers may return to business as usual and cause an end to the recent geographical changes in demand.
Explore the Best Multifamily Markets in 2021!
Cap Rates by Property Class Remain Unchanged
In 2020, some hypothesized that a cap rate shake up may occur due to the unprecedented economic conditions caused by the pandemic. Ultimately, white-collar workers saw less financial hardship due to the pandemic, and Class A properties retained their lower cap rates compared to Class B or Class C properties.
Learn more about apartment classifications in our post on Types of Apartment Buildings.
Conclusion
Multifamily housing remains an ever-popular investment thanks to fairly predictable and steady revenue from tenant rent payments and increasing property values. This reliability is reflected in low cap rates, and many investors appreciate low cap-rate properties for lower risk investment with the opportunity for monthly passive income.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
