Multifamily Continues to Rule CRE Markets
Cheaper capital backs a growing investment pool, according to CBRE.
Investors are flocking to multifamily, while lenders have a rising risk propensity in the sector, according to CBRE’s U.S. Capital Markets report for the third quarter.
Investors traded $155.4 billion in multifamily deals trailing four quarters as of September, up 21.6 percent year-over-year. The figure made up 34.9 percent of total CRE market share, besting industrial (23.6 percent), office (16.4 percent) and retail (14.3 percent).
Private investors continued to lead multifamily investment, CBRE Associate Director of Capital Markets Research Jaeyoung Kim told Multi-Housing News. These investors accounted for 63.3 percent of the multifamily market share during the third quarter, 280 basis points above their overall representation across the entire CRE acquisition environment.
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The rental market remained attractive, with annual property returns averaging 5.5 percent in September, CBRE revealed, citing NCREIF’s Property Index. The average figure for all of CRE clocked in at 4.6 percent. However, sectors such as senior housing reached 9.2 percent, while self storage returns stood at 6.1 percent.
Insurance up, prices down
Yet, expenses are putting downward pressure on returns. For instance, insurance costs disproportionately affected multifamily properties, with prices up 132 percent since December 2019, while industrial (100 percent), retail (109 percent) and office (89 percent) recorded slower growth, Travis Deese, director of multifamily research at CBRE, told MHN.
“At its peak in the first quarter of 2024, insurance, despite being the seventh-largest of the main eight expense categories, accounted for 27 percent of the overall increase in expenses. Now, despite it being the fifth-biggest expense, it only accounts for 17 percent of the total overall increase in expenses since 2019. This is primarily because it has been pulling back slightly while still outpacing some of the smaller expenses,” Deese added.
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While multifamily delivered above-average returns across CRE, rental assets did sell at a slight discount. Deals closed, on average, at a 0.8 percent price decrease year-over-year during the third quarter, CBRE pointed out, citing MSCI Real Assets. All other property types witnessed price increases, with the average index rising 3 percent.
This small slide comes after a period of slight, but measurable, multifamily capital appreciation that had begun in September 2024, when prices bottomed out and cap rates started stabilizing, Deese reasoned.
“We expect values to continue to see improvement into 2026. However, the macro environment of probable job losses and economic uncertainty has influenced short-term rent growth to the downside. This will likely persist until the final wave of new stock is absorbed and rent growth for all markets can resume in earnest,” he said.
Multifamily capital gets cheaper
Meanwhile, lenders are comfortable with higher multifamily loan-to-value ratios, suggesting a higher propensity for risk. LTV averaged 66.9 percent during the third quarter, compared to commercial, which clocked in at 60.6 percent. Notably, both metrics increased year-over-year—220 basis points for commercial and 190 for multifamily.
Not all lenders converged toward these underwriting conditions. Life companies’ share of non-agency loans dropped year-over-year from 48 percent to 21 percent in the third quarter, Kim told MHN. Alternative players, such as debt funds, stepped in to fill the gap, becoming the top multifamily lenders for non-agency debt at 55 percent of loan volume.
However, 10-year treasury spreads tell a different story. These averages diverged, with the multifamily spread dropping 27 basis points year-over-year to 141 basis points during the third quarter, while commercial increased 14 basis points to 197 basis points. Yet, the data does not include debt with an LTV ratio above 65 percent.
The interest gap between multifamily and commercial fixed-rate loans sits around 40 basis points, Kim added. “This disparity primarily stems from agency loans comprising a sizable share of our multifamily portfolio, which typically secures more favorable interest rate terms,” she continued.
Such debt issuance has also increased. Fannie and Freddie multifamily originations clocked in at $44.3 billion, up 53 percent quarter-over-quarter and 57 percent year-over-year. Average interest rates for agency loans with a seven-to-10-year term dropped 27 basis points year-over-year to 5.6 percent in September, 10 basis points below the overall CRE average.
