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Multifamily Cap Rates Show Signs of Stabilization
After nearly two years of steady expansion, multifamily cap rates appear to be finding their footing. Recent analysis by CoStar suggests that we may be at a turning point in the cycle, with early signs pointing toward a more balanced market heading into 2026.
Cap rates and rent growth---the key relationship
While most of the conversation in our industry continues to center on interest rates, CoStar’s National Director of Capital Markets Analytics, Chad Littell, reminds us that rent growth has historically been the more reliable driver of cap rate direction. When rents accelerate, cap rates tend to compress as investors anticipate higher future income. Conversely, when rent growth slows or turns negative, cap rates typically expand.
The good news is that rent growth appears to have bottomed out near one percent. Forecasts now call for a return to the 2.25%–2.5% range over the next 12–18 months. This expected lift has helped pin cap rates in place and, in some top-tier locations, even produced modest compression for best-in-class assets trading at sub-5% levels.
Liquidity and transaction momentum returning
Another factor supporting the stabilization is improving liquidity. Transaction volumes across the five major property types rose 19% year-over-year in the second quarter. While multifamily’s results were skewed by Blackstone’s $10 billion acquisition of 77 AIR Communities in 2024, the underlying trend is encouraging. Deal activity has followed a seasonal rhythm, with volume building into the second half of the year. This pattern repeated in both 2024 and 2025, suggesting investors are re-engaging after sitting on the sidelines.
Importantly, Littell emphasizes that modest changes to Federal Reserve policy are less impactful in the short run than these real fundamentals. Rent growth and liquidity, not incremental basis point moves, are what truly drive cap rate behavior.
Multifamily: first in, first out
Multifamily has long been considered the bellwether of commercial real estate, in part because one-year lease terms allow the sector to respond quickly to shifts in the market. Historically, apartments are the first to feel a slowdown and the first to recover. If current stability in cap rates and pricing holds, it could set the stage for other property types—like retail and industrial—to follow suit.
Our takeaway
At CALCAP, we view this as another sign that the multifamily market is working through the excess supply and macro headwinds of the past two years. While challenges remain, stabilization of cap rates, improving liquidity, and a modest recovery in rent growth all point toward a healthier investment environment ahead. As always, discipline in underwriting and a long-term perspective remain essential, but the outlook heading into 2026 is becoming increasingly positive.
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