Multifamily Market Heats Up: Cap Rates Rise, Investors Return

[Alexander Szikla]

The multifamily real estate market is gaining momentum as we close out 2024, driven by easing financial conditions and attractive cap rates, according to Marcus & Millichap's Q3 report.

Cap rates have surged to an average of 5.8% between July 2023 and June 2024, marking a 110-basis-point increase from 2022's low and the highest level since 2014. This rise has stabilized sale prices, facilitating negotiations between buyers and sellers. National vacancy rates have remained flat in the first half of 2024, following a 90-basis-point increase last year, with major metro areas showing particular resilience. Institutional investors are returning to the market, evidenced by increasing transaction volumes in July and August.

Supply dynamics vary across regions, with markets like Chicago, Milwaukee, and Pittsburgh benefiting from limited inventory growth below 2%. However, with nearly 1 million units under construction nationwide, supply pressures persist, especially outside the Sun Belt. However, annual rents for lease extensions grew by 4%, highlighting renters' preference to renew rather than enter the challenging homeownership market.

Looking ahead, the multifamily sector presents a mixed landscape of opportunities and challenges. The combination of lower debt costs and rising cap rates is reinvigorating investor interest, particularly in prime urban locations.