CBRE has reviewed a multifamily underwriting survey for 2024 Q4 of 18 different markets. It reported that underwriting assumptions for core and value-added multifamily properties were mostly unchanged. However, there was “substantial movement” in unlevered IRR targets for core assets, which increased.
One of the trends in lending over the last few years, based on Federal Reserve reports, has been banks tightening underwriting in CRE lending. Seeing that underwriting is largely stabilizing, at least in the one asset class, would be a sign of improvement.
However, CBRE did note that much is still unknown about how the Trump administration might affect economic growth, inflation, and the housing market. Lenders might have paused to assess what might happen this year and any changes they might need to make in response.
The going-in cap rate for average core multifamily properties was 4.90% in Q4; the average exit cap rate remained at 5.05%. Core unlevered IRR targets grew 12 basis points between Q3 and Q4 to reach 7.76% — the same as during the first quarter but four basis points below Q4 in 2023.
CBRE added that the spread should increase through 2025 and 2026, with going-in cap rates compressing more than exit cap rates. However, that assumes the Fed will continue to cut rates, which is a questionable premise, whether discussing the number, total, timing, and if any cuts happen in 2025.
A dozen of the 18 markets examined had stable IRR targets for core assets last quarter. Los Angeles and Philadelphia saw IRR targets decrease. On the flip side, in Atlanta, Austin, Chicago, and Washington, D.C., IRR targets increased.
Last quarter, CBRE added a new question about buyer and seller sentiment for core and value-added properties. Buyers were mostly positive to neutral. Sellers, however, were split. Core sellers were mostly neutral. Value-add sellers were more negative. Also, negative seller sentiment was more significant in the Sun Belt for core and value-add. However, Dallas and Miami did see positive seller sentiment for both asset types.
Assumptions of asking rent growth for core assets looking ahead for three years were up for the second consecutive quarter from 2.5% to 2.7%. Growth assumptions were particularly higher in Atlanta, Philadelphia, and Seattle, which largely drove the overall increase, suggesting that the other 15 regions might not have grown much.
Value-add going in cap rates grew 5 basis points to 5.24% but other metrics saw a slight improvement. Exit cap rates dropped five basis points to 5.38%. There was a 14 basis point gap between going-in and exit cap rates, similar to that of core assets. Value-add asset unlevered IRR targets were down by five basis points to 9.96%.
There was a core asset going-in cap rate compression in Boston, Los Angeles, Philadelphia, San Francisco, and Seattle. There were slight increases in Atlanta, Austin, Charlotte, Chicago, and Washington, D.C.
CBRE expects less variation in underwriting assumptions as markets gain clarity on the impacts of changes from the Trump administration.