Falling Risk-Free Rates, Rising Risk Premiums Lead to Small Multifamily Cap Rate Stability
Small multifamily cap rates barely budged in Q2 2020, narrowing by 5 bps.
Risk premiums for small multifamily rose to a record-high as 10-year Treasury yields fell.
Confidence in ability to pay rent varies with income level.
National average cap rates for small multifamily properties narrowed by 5 bps in the second quarter of 2020, reaching 5.8%. In the first quarter, cap rates widened by 21 bps, and there was some concern that they would further inch up as the economic downturn continued. However, small multifamily cap rates held steady due to a pricing tug of-war.
Falling risk-free interest rates have the effect of reducing cap rates, while increased operational risks have the effect of widening cap rates. When both phenomena happen at the same time, the net result is cap rate stability.
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