I recently came across a pitch deck for a multi-family deal looking to exit in 5-7 years. The purchase cap rate of this specific deal was 4%. This is not unheard of and I fully predict this deal will be successful, however the exit cap rate was projected to be 4.5%. When I saw this, I could not help but think of a CBRE chart I saw recently that showed historic cap rates were, and how fast and far they have fallen from only a few years ago.
I do not claim to be able to see the future and know that cap rates will be higher than 4.5% in 5-7 years. I do however want to prepare myself and my company for cap rates back near the 6% mark where they were just a few short years ago. Especially given the markets volatility, inflation still out of control, and construction costs still at all-time highs, I believe the best course of action when looking at the future is to project nearly the worst-case scenario. Anything to the positive will be just that.
