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What Should Stabilized Multifamily Cap Rates Be?

Working paper #519
Peter Linneman

Focusing on the “modern” real estate era of the last 25 years, commercial real estate invest-ment markets have become increasingly tied to, and therefore influenced by, global capital markets. Examining historical forward cash flow cap rate spreads (over 10-year Treasuries) and filtering out “abnormal” periods such as the overleveraged 1980s, the tech boom, and the Russian ruble crisis, we are able to benchmark that growing interdependence and, in turn, anticipate multifamily cap rate movements. Our analysis demonstrates that a disciplined approach exists to analyzing multifamily cap rates, based on a theoretical foundation. Because multifamily properties have short leases and fairly predictable Cap Ex requirements, they are ideal candidates for cap rate analysis. In “normal” economic times, forward cash flow cap rate spreads (over 10-year Treasuries) for institutional-quality multifamily properties are roughly 50 to 100 basis points, as the market and operating risk premium of these properties relative to Treasury bonds is offset by the stability of their cash flow growth potential.

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