Key Points:

• Multifamily cap rates have stabilized at around 5.7 percent after peaking in early 2024.
  
  
• First American’s Multifamily Potential Cap Rate Model predicts a slight decline in multifamily cap rates by year’s end, driven by rising sales activity and renter household formation.
  
  
• While certain markets are oversupplied, the national scarcity of housing and strong demand for rental units make multifamily a resilient asset class in today’s market.

Multifamily capitalization (“cap”) rates^[1] have stabilized, hovering around 5.7 percent for the last five quarters. After peaking in the second quarter of 2024, the national multifamily cap rate has slowly declined by a modest six basis points. Although this change is slight, it is notable given that multifamily cap rates had steadily increased for nearly two years, from the second quarter of 2022 until the first quarter of 2024. During that period, multifamily cap rates increased by a total of 1.2 percentage points, representing a valuation reduction of nearly 22 percent. 

Much of this newfound stability in cap rates is a result of rising purchase demand in the multifamily market. When multifamily property prices initially fell in the latter half of 2022, many investors were cautious about deploying capital too early to avoid catching the proverbial falling knife. However, multifamily property prices are now flat on an annual basis. This stability, combined with higher yields, has lured buyers back.

“Multifamily supply remains scarce at a national level. Coupled with growing demand to lease that space, the supply scarcity means multifamily will likely be a resilient asset class, even in the face of heightened macroeconomic turbulence.“

Sales Activity Turns a Corner

This rebound in purchase demand is reflected in growing sales transaction activity. In the first quarter of 2025, multifamily transaction volume increased to $30 billion, a 38 percent increase compared to one year ago. 

First American’s Multifamily Potential Cap Rate (PCR) model, which models a “potential” multifamily cap rate based on multifamily market fundamentals, including sales transaction volume, multifamily debt flows and renter household formation, estimates that rising transaction volume will continue to gradually drag multifamily cap rates down as the year progresses. That decline will be slight, however, with our multifamily PCR model estimating a 0.3 percentage-point decline in cap rates by year’s end, equivalent to roughly a 5.5 percent valuation increase. This is based on multifamily sales volume growth of 10 percent in 2025 compared to 2024 and a slower, but still positive, rate of renter household formation.

Multifamily Fundamentals Remain Strong

Though changes in prospective returns can lure investment capital in and out of the market, the drivers underlying the growing interest in owning multifamily properties are all about supply and demand. Despite a large quantity of apartment units coming to market this year, a simultaneous drop in the number of construction starts will limit future supply. Yet, even after all these apartments and single-family homes under-construction come to market, the country will still be undersupplied relative to total housing units demanded. The nation’s long-term housing shortage is gradually superseding the impacts of oversupplied conditions in some markets. As buyers increasingly compete to acquire apartment properties that will, in many places, be in short supply, multifamily cap rates will fall.

Additionally, renter household formation, a measure of demand for rental units, has rebounded from a low in the third quarter of 2022, returning to levels not seen since the pandemic surge in 2021. Given the ongoing affordability challenges in the home purchase market, demographic shifts as Generation Z ages into their prime renter household formation years, as well as changing attitudes about renting versus owning, higher levels of renter household formation may persist for some time. These dynamics should exert downward pressure on multifamily cap rates.

While it’s true that some markets are oversupplied, multifamily supply remains scarce at a national level. Coupled with growing demand to lease that space, the supply scarcity means multifamily will likely be a resilient asset class, even the face of heightened macroeconomic turbulence. 

About the Multifamily Potential Cap Rate Model 

The multifamily Potential Cap Rate (PCR) Model estimates cap rates based on the historical relationship between multifamily transaction volume, annual changes in renter household formation, and multifamily mortgage flows. The multifamily PCR Model uses these metrics to establish a potential cap rate level that is supported by these market fundamentals. When actual multifamily cap rates are significantly above the multifamily PCR, it indicates that market fundamentals supported lower cap rates than were observed. Conversely, when actual cap rates are significantly below the potential cap rate level, market fundamentals supported higher cap rates than were observed. Multifamily cap rates are aggregated nationally, and the PCR Model is updated quarterly.