Multifamily property values remain consistent with fundamental economic housing market trends, and the rate of appreciation in the market segment has steadied over the past year, according to Freddie Mac’s U.S. Economic and Housing Market Outlook for September, the GSE reported in a news release Sept. 18.
“The decline in cap rates and growth in rents (adjusted for inflation) are key fundamentals that explain the rise in apartment values over the past decade,” Frank Nothaft, Freddie Mac vice president and chief economist, said in the news release. “Seen through this lens, the rise in property values appears to be consistent with overall economic forces, and the slower appreciation over the past year reflects the bottoming of cap rates.”
Nothaft noted that cap rates are expected to gradually move higher in the coming year as long-term yields move higher. Rents also are likely to outpace overall inflation, leaving apartment values firm and on solid ground.
Additional highlights from Freddie’s U.S. Economic and Housing Market Outlook:
• Multifamily property values increased a cumulative 41 percent between the second quarter of 2000 and the second quarter of 2013, as measured by the National Council of Real Estate Investment Fiduciaries multifamily index and the Freddie Mac House Price Index.
• During the past 13 years, property values are only slightly more than overall inflation in the U.S.
• Apartment building values are affected by net operating income and cap rates; cap rates have decreased approximately 35 percent over the past decade, which is a major reason why property values have increased.
• The spread between cap rates and Treasury yields averaged 3 percent from 1996-2005 and 4 percent during the first half of 2013; this spread reflects relatively cautious valuations by investors, yet remains near all-time highs.
• Rental revenue advanced over the past three years, while vacancy rates have come down and apartment markets tightened. Rents have increased about 3 percent in apartment buildings compared with a 1 percent increase in the Consumer Price Index, year over year.
More information about the September 2013 U.S. Economic and Housing Market Outlook is available on the Freddie Mac website.