From REIS Reports
The Fed raised its overnight borrowing rate by 25 basis points in December 2016 and then again in March of 2017. Everyone had been expecting the first increase given the balance of employment, wage and inflation growth in the fourth quarter, yet the market responded rather benignly to the increase in March.
In fact, cap rates for multifamily properties actually declined in the first quarter by 10 basis points to 5.9% from 6.0% in the fourth quarter. It had been 5.9% in the second quarter of 2016. We show the long run average (based on transactions over the last ten years) at around 6.5 percent – shown as the horizontal light blue dotted line in the chart below. Note how both the mean and the 12-month rolling cap rates have declined steadily since early 2014 as the perceived strength in the multifamily market has boosted prices. Although the multifamily effective rent growth rate slowed in the first quarter to a weak 0.2%, cap rates declined which suggests that investors continue to see value in owning this asset class. Even though we update transaction data regularly as the filings data is reported with a lag, Reis does not expect these trends to vary much. Cap rates are clearly at all-time lows as this preferred asset class has performed well throughout this recovery. Many had expected that cap rates would go up this quarter with the hike in the fed funds rate, but we have frequently cautioned that cap rates do not necessarily move in step with the fed funds rate.
Moreover, we reiterate our caveat that the average and median cap rates are driven by the transactions that closed in a particular quarter, and some quarters may see more sales in higher-end properties than others. This creates what we call “selection bias” in the data that appears as volatility shown here in the dark blue line. This is why we include the rolling average. While the dollar volume of sales fell significantly in the first quarter to a three-year low, both the average and median sales prices per unit were more in line with previous quarters which suggests that the properties that traded in the quarter held the cap rates steady.