Multifamily Cap Rates (capitalization rates) in Real Estate Investing
For most investors, cap rates are the most important metric for evaluating the performance of an investment in the Boston commercial multifamily market. The cap rate is the rental yield divided by the current market rental yield on a comparable property. This figure gives investors an idea of how much money they would be making on their investment relative to the rent they are collecting. By comparing their returns to other investments, investors can determine if they are getting a good deal or if they should look for other properties.
The higher the multifamily cap rates are, the higher the investment risk. The areas that had low cap rates and high price tags included areas close to MIT and Harvard, Downtown, Fenway/Mission Hill and Seaport area. The market cap rate had a high of 6.0% in 2016 in the United States, 5.0% in both Boston and Boston 3 Star, and a value lower than 4.5% in Boston 4-5 star. There has been a gradual decline in this value across the 4 markets, with 2021-2022 gaining the least percentages of about 5.2% in the United States, 4.35% in both Boston and Boston 3 Star markets and about 3.9% in Boston 4-5 Star.
The projections for the subsequent years 2022 to 2025 showing a flattening curve with a slight rise in this figure. The average cap rate based on the sale comparable statistics stood at 6.0%, with a low of 2.1%, a median of 6.0% and a high of 12.0%. Various factors affect the cap rate, including:
a) Market Size, Multifamily Cap Rate and ROI
Market size is a critical factor in determining the success of an investment property. A property located in a large city will likely have a much lower cap rate than a property located in a small town. There are large amounts of capital available for investment in large cities. It thus attracts a huge competitive population as opposed to small towns. The overall supply and demand of the units experienced a steady rise from 177, 329 in 2010 to 247,659 in 2021.
This also signified a percentage increase from 0.9% to 3.1%. The supply and demand of 4 and 5 star rose from 30, 565 to 93,668 units marking a growth from 5.0% to 7.4% and the 3 star supply and demand rising from 78, 268 to 85,441 units marking an increase of 0.2% to 1.3% in growth. 1 and 2 star supply and demand grew from 68,496 in 2010 to 68,550 in 2021.
The overall sales increased from 145 to 412, an increase from $1B in volume to $5.1B. The overall deliveries and under construction increased from 177,329 units in 5,943 buildings in 2010 to 247,657 units in 6,495 buildings in 2021.
b) Best Real Estate Investments In The Right Location
The location of a property relative to the cap rate in a given neighborhood can have a large impact on the property’s return on investment. The safety of a location can impact the cap rate. An insecure place is often risky and lowers the market demand, thus raising the cap rates. It then becomes harder to invest in such areas due to the security uncertainties.
Boston has had an increase in demand in the multifamily market. The growth in sales is one of the reasons why Boston is best suited for an individual seeking to invest in multifamily apartments. The cost for a unit in Boston is about $460,000 while the same unit costs about $250,000. In East Cambridge, a two apartment building cost $325 million.
c) Growth Potential – How To Create Wealth Investing In Real Estate
The growth rate of property values over the past year has significantly impacted cap rates. As the growth rate increases, the average cap rate decreases. Also, as the growth rate decreases, the average cap rate increases. It means that the same amount of money will buy a home with a lower cap rate today than it would have been able to buy the same house with a higher cap rate a year ago. Here is a breakdown of the change (YOY) across three different annual trends.
The vacancy change in 2020 Q4 in the 12 months stood at -2.9%, a historical average of 4.7% and a Forecast average of 4.4%. The peak of the vacancy change (YOY) had a figure of 8.0%.
The asking rent growth over the 12 months in 2001 Q1 was 10.7%, with a historical average of 2.2%. The forecast average for this annual trend was 4.2% with a peak value of 13.1%.
Effective Rent Growth (YOY)in the 12 month period stood at 12.7%, with a historical average of 2.2%. The annual trend also had a forecast value of 4.2% and a peak value of 13.6% in 2021 Q4.
d) How Capital liquidity Affects Multifamily Cap Rates
Cap rates are also affected by how much capital is available to invest in the property. When there is a lot of capital available, investors require higher returns to pay for the risk of investing their money. As a result, cap rates are typically lower than in a market with little capital liquidity.
e) Asset stability
When determining multifamily cap rates, the first thing you should consider is a property’s asset stability. The better the asset stability, the lower the cap rate can be. Property with better asset stability can withstand a higher interest rate. It makes it easier for investors to purchase properties.
The multifamily market in Boston is strong, with rental yields and capitalization. It is largely due to the high demand for apartments in Boston, which has caused vacancy rates to fall to 3.9%. Even with these low vacancies, there is still a lot of upside for investors in this market, as the vacancy rate is expected to fall further. This increase in supply has led to a decrease in cap rates, which is likely to continue over the next several years. CoStars vacancy stayed below the 5% mark while several other markets witnessed drops from about 14% to 5%.
Several benefits come with having a low multifamily cap rate. First, a soft cap rate means that your property will appreciate faster than properties with a higher cap rate. As a result, you will have more equity built up over time.
Another benefit of low multifamily cap rates is that they do not require a large down payment. It makes it easier for first-time homebuyers to get into the real estate market. As your holdings appreciate, the leverage provided by a low cap rate will allow you to purchase more real estate. Such rates can give excellent returns. If you have a reduced cap rate, you won’t have to put as much money down on your home. It makes it easier for you to build a successful real estate career.
High Sales Volume
One of the most critical factors in real estate is sales volume. Sales volume is a vital indicator of the real estate market’s health. Low sales volume means a lack of demand, which translates to weak prices. High sales volume means a robust economy and a healthy real estate market. It is crucial to the property owner and a real estate agent. The more houses you sell as a real estate agent, the more money you get, and your career becomes more successful.
For many years, Boston was known for being one of the most expensive cities in the United States. It was primarily since real estate prices in Boston were driven up by the need to live as close to downtown as possible. Its world-class museums, excellent sports teams, and loads of cultural events make it a great place to live. The overall sales for Boston Multi-Family units saw a total of 145 deals made in 2011, translating to a volume of $1B with a turnover of 3.7%.
The average price for the sales made was $8,055,346 with an average price per unit coming to about $187,165 with an average cap rate of 6.5%. The deals reached a high of 412 in 2021 with a volume of $5.1B and a turnover of 5.2%. The average price for these transactions came to $12,950,518 with an average price per unit coming to about $406,193 and an average cap rate of 6.4%.
The market trends witnessed from 2010 to 2021 saw the price per unit steadily rising from $223,727 per unit to $452,173 in 2021. This increase marked an increase in the price index from 134 to 271. With the cap rate decreasing from 5.5% to 4.3%. Sales in the Boston area’s single-family home market set another record in 2017, with the region’s five-year streak of double-digit annual increases in sales volume ending in the fourth quarter. The area now has the nation’s second-highest level of sales, behind only San Francisco.
See our Blog on Lynn, MA and how the job market there is growing. (Below)
Continued Below
Growth in the Job Market
COVID-19 affected most sectors of the economy and caused several individuals to lose their jobs due to restrictions and redundancy. While this may be true, there is a positive forecast of the job market in Boston with a projected growth of about 4.9% in 2022. This increase in job growth is anticipated to continue through to 2026 with an average of 0.7% every year. Although the hospitality and health sector were adversely affected, the projected employment growth of the health industry estimated at around 5%. The R&D industry in Boston has added about 17% of jobs which amounts to 13,500 jobs in the market from February 2020.
Is It a Good Time To Invest Into Real Estate
The Boston Commercial Multifamily market is one of the largest and most active in the nation. The Boston Multifamily commercial overall sales stood at $5.1B in volume with a 5.2% turnover in 2021, had a vacancy of 52 units with a percentage of 4.6% and ranked 24 in Downtown Boston. It also came in 1st with a total of 1,193 units, 10.7% investment and a 0.4 construction ratio. Since the financial crisis, the city has been a hotbed for development, with 6,495 buildings and 247,659 units and a vacancy of 4.3%. This intense activity will continue in the coming years, fueled by strong national and local economic growth and a growing millennial population.
Boston has an exciting multifamily commercial real estate market that serves as its backbone. This Boston apartment investing market guide will help you understand what it takes to invest in this market analysis. It will provide tips and advice to help you on your way. The current market trends and projections with 6,774 delivered units in the past 12 months, 13,408 absorption units, a vacancy rate of 3.95 and a 10.7% asking rent growth in the 12 months are favorable statistics for investors. There is no better time to get in on the action than now.
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