Hello all,
I am trying to get my head around how people are thinking about cap rates in the multifamily sector in the coming years. I have found a lot of investor presentations, proformas, etc for mid-rise multifamily development deals from the last 24 months across the U.S that are contemplating scenarios with cap rate compression, no change, or only slight expansion.
Given how low-interest rates are, and the distance rumblings of a possible recession looming, it is so crazy to assume a 5 basis point expansion per year? 10 basis points?
Anyone who says they know what is going to happen to cap rates in the future is full of crap. A widely accepted industry standard for future sale valuations is expansion of cap rates by 5 bps per year. So, spot cap rates now are 4.50% and you are selling in ten years--underwrite stabilized year 11 NOI at a 5% exit cap.
Most people / shops I have seen use 50-100 bps over ten years, depending on the deal and location (and if they need to stretch to win, it gets closer to 50 bps).