As Cap Rates Compress, Multifamily Investors See Value-Add Potential In Newer Properties

Rising risk factors for older buildings as well as across-the-board cap rate compression have some investors opting to buy newer buildings and upgrading them rather than buying older buildings to overhaul in the more traditional value-add fashion. 

“Historically, when you bought an older property, you got a better price per unit and a better cap rate than you would on a newer property, which gave you more ability to push rents and make a return,” Orion Real Estate Partners principal Marc Venegas told Wealth Management.

“But over the last few years, those spreads went away, and investors weren’t getting the same benefit for buying older properties that they used to. Old or new, you were almost paying the same cap rate,” Venegas said, referring to a measure of the rate of return on a property. 

The average cap rate for older properties — those more than 15 years old — compressed to 4.3% from 6.2%, according to WM, citing CoStar data that looked at sales between 2014 and 2022. The average cap rate for newer properties dropped to 3.8% from 5.3%. The gap between cap rates for newer and older properties shrunk from 0.9% to 0.5%, WM found. 

With a relatively level playing field in terms of valuation, investors look at the insurance and maintenance costs of older buildings, which are typically higher, and the effects of inflation and the looming possibility of a recession on the renter pool. 

Newly highlighted concerns about credit repair companies engaging in schemes to fraudulently improve clients’ credit flagged by the Federal Trade Commission add to the issues facing multifamily investors.