- Multifamily cap rates are approaching historically normal levels, stabilizing after a period of volatility.
- While the Fed’s 50 bps rate cut was announced, experts caution property values may not react immediately as the market adjusts to a new normal.
- Higher deal activity and narrowing bid-ask spreads are seen as positive indicators of stabilization, with investors returning to the market.
As reported in GlobeSt, real estate experts are seeing signs of market stabilization, particularly in the multifamily sector.
But they also caution that valuations may not soon reflect the Federal Reserve’s recent 50 bps rate cut. CRE continues to adjust to new economic conditions, and the effects of the first rate cut in four years may take some time to show up in property values.
From The Horse’s Mouth
“I’m optimistic that we’re at the forefront of the next cycle,” said Mitch Sinberg, Senior Managing Director of Mortgage Banking at Berkadia. He explained that the bid-ask spread, which had persisted over the past 18 months, is finally narrowing, prompting more buyers who had been on the sidelines to enter the market.
Sinberg credits the increase in transaction activity in recent weeks to reduced volatility in the 10-year Treasury yield. “These are all barometers and indicators that things are slowly going back to normal,” he noted.
Impact of Rate Cuts
Despite the positive momentum, both Sinberg and his colleague Roberto Pesant, Senior Managing Director of Investment Sales at Berkadia, emphasized that the Fed’s rate cut may not have an immediate impact on property values.
“We fully expect the Fed to lower the overnight rate,” Sinberg said prior to the rate reduction. “But we believe this is already priced into the longer end of the curve, which is what largely drives real estate valuations.”
Stable Cap Rates
Cap rates, which had experienced extreme fluctuations in recent years, are now approaching normal levels.
Sinberg believes the market has stabilized, stating, “I think the people who are waiting for 3% cap rates will be waiting for a very, very long time. On the other hand, those expecting cap rates to expand to 7% will also be waiting for a long time.”
Pesant echoed this sentiment, adding that current cap rates in the low to mid-five percent range are a healthy and sustainable market level. He also noted that certain markets, such as South Florida, may continue to command a slight premium due to their post-COVID performance and investor demand.
Future Outlook
As the market keeps stabilizing and interest rates settle, more investors are re-entering the multifamily sector. “There’s a lot of pent-up demand, and we’re seeing groups that have been sidelined for the last 24 months come back into the market,” Sinberg said.
Pesant added that stabilizing interest rates is critical for risk-averse investors comfortable with the traditional risks associated with multifamily deals.
Looking ahead, both Sinberg and Pesant expect transaction volumes to rise through 2H24 as participants adjust to the lower-rate environment. “We are optimistic that as consistency returns, so will transaction flow,” Pesant predicted.
