Cap Rates Fall as Multifamily Returns Stay Ahead of CRE Peers
Multifamily properties have maintained a multi-year track record of outperforming other property sectors, delivering total annual returns of 5.48% in the third quarter, according to a Newmark multifamily capital markets report.
Multifamily returns continue to exceed the NCREIF All Property Index, which registered 4.65%, Newmark said. This marks the sixth consecutive year of sector outperformance since 2020.
Continued cap rate compression in the Core and Core Plus segments signals persistent investor interest. Transactional cap rates increased 13 basis points quarter-over-quarter, reaching 5.63%, while REIT-implied cap rates decreased 5 basis points to 5.23%. NCREIF cap rates, indicative of the Core and Core Plus segment, saw the most significant decline, falling to 4.94%.
West Coast and Sun Belt markets led multifamily investment returns for the quarter. In the West, San Jose, Orange County, San Diego, and San Francisco all delivered returns above 7%, underscoring the impact of supply constraints and resilient demand. San Jose leads nationally with annualized total returns of approximately 9.3%, driven by tech-oriented fundamentals and constrained supply. Orange County posted returns of about 8.5%, fueled by consistent multifamily demand and tight vacancy rates. San Diego, with annualized returns of about 8.1%, also benefited from tight vacancy rates and strong demographic growth, while San Francisco, with returns of roughly 7.5%, continued to recover from the pandemic amid persistent affordability issues.
Seattle continued its run as a prime tech-centric market with resilient urban appeal, delivering returns of about 7.9%. Riverside, with estimated returns of about 7.2%, highlights its strength as an affordable alternative to core urban centers. Regulatory headwinds and softer urban core performance pushed Portland’s returns down to about 4.9%, while Oakland lagged the broader Bay Area trend with returns of roughly 4.8%. In Los Angeles, rent control and regulation have moderated returns in the historically high-demand market, leaving annual returns there at about 4.5%.
Sunbelt supply headwinds meant only Houston and Miami ranked in the top ten, while other Texas and Southeast metros fell further down the list with more moderate returns. Houston ranked second in the nation with annualized returns of roughly 9%, standing out among Sunbelt metros despite higher regional supply. Miami, with returns of about 8.4%, was propelled by migration patterns and elevated rent growth.
West Palm Beach posted returns of about 7.3%, placing it among the leading markets in the region with demographic-driven expansion. Orlando benefited from employment strength and Florida’s population growth trend to post returns of around 6.7%. Tampa and Fort Lauderdale also participated in the broader multifamily boom, posting annual returns of 6.5% and 6.2%, respectively. Nashville experienced a slight deceleration from peak pandemic-era returns at 6.1%, while Charlotte also fell comparatively short at 5.7% as supply increased. Denver posted steady performance with returns of 5.4% amid slower absorption relative to Sunbelt peers, and Atlanta faces a deceleration after several years of rapid expansion, posting annual returns of just 4.6%.
The Midwest and Northeast remain competitive, but only suburban nodes and Chicago break above 8% in annualized returns. Suburban Maryland delivered about 8.7%, reflecting demand spillover from core employment hubs. Washington, D.C., returned an estimated 7.7%, benefiting from sustained demand due to federal employment stability and population growth. Boston posted approximately 7% returns, supported by the education and healthcare sectors. New York registered around 6.3%, lower than expected for a gateway city due to rent regulations and slow urban recovery. Chicago led the Midwest with diversified job growth and urban demand, though it slightly trails coastal peers. Minneapolis posted close to 4.1%, reflecting lower performance likely impacted by the regulatory climate and supply-demand balance.
Regions experiencing outsized development — Dallas, Austin, Raleigh, and Phoenix — saw distinctly lower returns, revealing downside risk tied to rapid multifamily expansion. Raleigh returned an estimated 4.3%, reflecting a stabilizing sector after significant new development. Dallas posted roughly 5.9%, notable for its transaction volume but not for outsized returns given high new supply. Phoenix returned near 5.2%, reflecting moderating rent growth due to increased competition. Austin recorded the lowest performance at about 2%, trailing after a surge in development and supply outstripping demand.
Source: GlobeSt/ALM