CPI Blog

How Rising Interest Rates will affect Multifamily Cap Rates

REID Keeley Hubbard | Syndication Deals

by | Feb 4, 2023

Dear valued existing investors and future investors,

Here is this week’s CPI Capital’s news briefing. This briefing contains a mixture of updates, commentary and informative related articles about the lucrative world of passive real estate investment.

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With interest rates likely to continue to rise into at least the middle of this year, many investors are asking what impact will this have on multifamily and BTR-SFR cap rates? So, this week, let’s take a look at this in more detail. But also don’t forget to look at our top 10 forecasts for the US economy and CRE in 2023

Some background

Capitalisation rates for multifamily apartments and BTR-SFR properties have trended downward over the past two decades or so. Cap rates are calculated by dividing an asset’s net operating income (NOI) by its market value and is a measure of an estimated return (or yield), on an investment property assuming no debt is used to purchase it (ie unleveraged).

NOI is the remaining income due to an owner after paying operating expenses for the property.

Cap rates for multifamily and BTR-SFR properties across the US averaged around 4.7% in 2022 but, as high inflation persists and the Federal Reserve pursue a policy of higher interest rates, a number of investors are concerned that increasing interest rates might have an adverse effect on their property values forcing cap rates to rise for the first time in over a decade.

Correlation between interest rates and cap rates is weak

For several decades, falling interest rates have caused cap rates to decrease and, as a result, multifamily and BTR-SFR properties values have risen.

But now, with the Fed hiking interest rates, such rising rates mean, amongst other things, higher borrowing costs for investors looking to fund property purchases. Despite this, the correlation between long-term interest rates (often represented by yields on the 10-year Treasury) and cap rates is not particularly strong.

For example, the yield on 10-year Treasury bonds moved from 3.6% in 2Q 2003 to 5.1% in 2Q 2006. Multifamily apartment cap rates decreased from 7.6% to 6.4% in the same period. Between 3Q 2016 and 4Q 2018, Treasury bond yields rose from 1.6% to 3.0%, but cap rates changed only slightly from 5.6% to 5.5%. And, finally, when yields on Treasuries rose to 1.5% in 4Q 2021 (from 0.7% in 3Q 2020), multifamily cap rates fell to record lows or around 4.7%.

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Relevance of 10-year Treasury yields

Many investors view the interest rate paid on 10-year Treasury bonds as being “risk free” and, accordingly, seek a return on multifamily or BTR-SFR real estate investments higher than such yield. In theory, as cap rates are a measure of expected return on an investment, the need for higher “risk-free” rates means that sellers may have to reduce their prices or, alternatively, increase the amount of cash flow (by raising rents) to attract investors with better yields. In turn, this could push up cap rates.

Yet, in this current cycle for multifamily and BTR-SFR properties, there has not been a significant change in cap rates and, generally, they remain near all-time lows for commercial real estate (CRE).

Forecasting future cap rates

It’s possible to make forecasts about future cap rates based on the historical relationship between levels of rental income, occupancy rates, recent trends in the multifamily and BTR-SFR sectors, interest rates and the levels of commercial debt. Such metrics use these market fundamentals to establish a potential cap rate.

In such cases, when actual cap rates are far above the potential cap rate, there is a greater chance actual cap rates will decline. Conversely, when actual cap rates are well below the potential cap rates, there is a higher chance actual cap rates will increase.


Multifamily apartments and BTR-SFR properties are uniquely positioned to re-price their rents during inflationary periods in order to offset higher nominal interest rates, in view of the short-term nature of their leases. Indeed, multifamily and BTR-SFR cap rates are fundamentally a real rate of return and only likely to be affected by changes to the real rate of interest.

Furthermore, even though the 10-year Treasury yield has moved upwards, the multifamily and BTR-SFR market continues to benefit from historically high occupancy rates and some rent growth. This may mean cap rates hold steady or only move upwards slightly.

On balance, even if cap rates move upwards slightly as investors shift their risk tolerance, this is expected to be a shift to a new normal, rather than significant industry disruption.

CPI Capital is well aware that rising interest rates can have some impact on cap rates for multi-family and BTR-SFR property assets, sometimes causing them to compress. However, one of our expectations for 2023 is that interest rates are close to peaking and may well see an easing of rates by year end. In such a case, any impact of higher interest rates on cap rates may be relatively short term.

CPI Capital also remains confident about the multifamily and BTR-SFR sectors and is nimble enough to be selective about the locations and projects into which it invests. This is important given that not all markets and/or market sectors move in the same way and at the same time–so the effects of rising interest rates may only have a marginal effect on cap rates and, hence, capital values. They can also be managed with an interest rate cap! 

Yours sincerely,
August Biniaz
CIO, Co-Founder CPI Capital

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