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Cap Rates Decline, More Drops Expected in 2026
Multifamily valuations could rise as cap rates catch up to fundamentals.
Jordan B.
November 19, 2025
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Good morning. Multifamily cap rates are starting to slip, led by Core assets and supported by strong returns. New data shows compression is already underway, with fundamentals pointing to more in 2026.
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🎙️This Week on No Cap: Winston Fisher joins to talk about turning a 100-year-old firm into the creative force behind AREA15.
Market Snapshot
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Cap Rate Outlook
Cap Rates Decline, More Drops Expected in 2026
Multifamily returns remain ahead of the pack, but all eyes are on 2026, as easing financial pressures may finally pull cap rates lower.
Multifamily keeps outperforming: Multifamily posted a 5.48% annual return in Q3, outpacing the broader NCREIF All Property Index for the sixth straight year. Investor demand remains strong, with Core and Core Plus cap rates dipping to 4.94%, signaling stabilization despite slight upticks elsewhere.
Regional leaders: West Coast markets led the pack, with San Jose (9.3%), Orange County (8.5%), and San Diego (8.1%) posting top returns thanks to tight supply and tech demand. In the Sun Belt, Houston (9%) and Miami (8.4%) outperformed, while Austin (2%) and Raleigh (4.3%) lagged due to oversupply.
Mixed results: The Midwest and Northeast were mixed. Chicago posted about 8% and suburban Maryland 8.7%, with D.C. (7.7%) and Boston (7%) also solid. New York underwhelmed at 6.3% amid regulatory constraints and a slow recovery, while Minneapolis lagged at 4.1%.
Room to compress: First American’s Multifamily PCR model shows fundamentals support a 5.1% cap rate, well below the actual 5.7% in Q3. The 60 bps gap points to temporary pressures, such as debt distress and tight credit, with rates expected to decline gradually in 2026.
What’s driving the shift? More capital chasing stabilized income means lower yields—and lower cap rates. Three forces are setting the stage:
1. Distress resolution: As more distressed assets sell, pricing benchmarks reset and trading activity rises—bringing valuations and cap rates closer in line.
2. Easing credit: Resolved workouts free up lender capital, increasing multifamily debt flows.
3. Demand stability: Renter household formation rose 2.7% YoY, supporting leasing activity and net operating income growth.
➥ THE TAKEAWAY
Return to fundamentals: The cap rate correction will be slow, but it’s on the way. As financial pressures ease, fundamentals like renter demand and credit access will drive pricing again. For owners, lower cap rates could lift values and refinancing options; for investors, 2026 may be the time to buy before prices rise.
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✍️ Editor’s Picks
Alpha advantage: Commercial real estate is recovering unevenly, favoring investors who target the right assets in the right places.
Climate cuts: Federal climate grant cuts are straining cities and putting billions in commercial real estate at risk amid rising insurance costs and stalled mitigation projects.
Transaction turnaround: CRE transaction activity rebounded in Q3, with total deal volume up 25% year-over-year, led by multifamily and office gains.
Trump towers: Trump’s firm is eyeing a major Saudi project, blurring lines between presidential diplomacy and private development.
Renter migration: Out-of-market renters now dominate traffic in nearly half of U.S. metros, as affordability and flexibility drive relocation trends.
Data blackout: The government shutdown halted key economic reports, leaving the Fed, investors, and businesses flying blind.
Affordability fallout: Pandemic-era policies and tight credit have made homeownership unreachable for many Americans, says Amherst CEO Sean Dobson.
🏘️ MULTIFAMILY
Landlord claims: A court ruled that federal, not state, standards govern lease termination in bankruptcy, limiting landlords’ claims.
Adaptive reuse: Los Angeles is second only to Manhattan in future apartment conversions, with over 5,600 units in the pipeline.
Sunbelt refi: Cortland secured a $192M Freddie Mac refinancing for a three-state, 1,137-unit multifamily portfolio.
Algorithm limits: San Diego’s rent algorithm law limits private data use, but a stricter California ban on all external data starts in 2026, pushing landlords to rely on internal metrics.
Recall ripple: A wave of political recalls across the Bay Area is threatening local pro-housing officials and chilling zoning reform.
🏭 Industrial
Google expansion: Google is investing $40B to build three AI-focused data center campuses in Texas, its largest U.S. investment to date.
Storage companion: Self-storage demand is rising in cities with high manufactured housing, where smaller homes drive the need for extra space.
Amazon anchor: Venture One has secured a $54.3M refinancing loan for a fully leased Amazon warehouse in Kenosha, WI.
Richmond rise: A 180-acre, 2M+ SF data center campus has been approved near Richmond, as demand spills over from Northern Virginia.
Debt refresh: BlackRock has supplied a $103 million loan to refinance Chesnut Properties’ Gillespie Field iPark in San Diego.
Supply uncertainty: The self-storage sector faces mixed signals, with development interest cooling despite a brief rate rebound.
🏬 RETAIL
Final selloff: Seritage Growth Properties has only six assets left not in sale talks as it nears full liquidation of its former Sears/Kmart real estate portfolio.
Fashion footprint: Despite economic headwinds, luxury brands like Gucci, Louis Vuitton, and Prada are expanding their U.S. retail footprints
Travel expansion: Peachtree Group is backing Briad Group with up to $200M to develop 40 Circle K–anchored multibrand travel centers across the Northeast.
New phase: Net lease cap rates are shifting as private investors favor high-credit tenants and longer leases.
Legacy lost: After 127 years, iconic New Orleans jeweler Adler's is closing, with experts citing Trump-era tariffs and soaring gold prices as key factors squeezing independent retailers.
🏢 OFFICE
Uneven recovery: Only a few U.S. cities are seeing office market rebounds, while most struggle with high vacancies and falling values due to the lasting impact of remote work shifts.
HPP consolidates: Hudson Pacific Properties will enact a 7-to-1 reverse stock split on Dec. 1 to boost share value after a $136M loss.
Spread tightening: CRE loan spreads for low-leverage office deals hit their lowest level of 2025, signaling renewed lender confidence in higher-quality office assets.
Loan trouble: Brookfield’s $515M CMBS loan tied to its stake in Manhattan’s New York Times Building has entered special servicing
HQ hunt: Hines is in talks to buy Boeing’s former Chicago HQ at 100 N. Riverside Plaza after Sterling Bay backed out.
Relocation strategy: Booz Allen Hamilton will move its headquarters from Tysons to Reston Station, downsizing by 27%.
🏨 HOSPITALITY
Bay bet: Sixth Street bought San Francisco’s Clancy hotel for $115M—2025’s priciest Bay Area hotel deal so far.
Casino debut: Hard Rock and the Tejon Indian Tribe have opened a massive new casino north of Los Angeles, betting $600M on tourism.
Hudson sale: Related and Oxford sold the Equinox Hotel at Hudson Yards for $541M to Japan's Mori Trust, marking one of Manhattan’s biggest 2025 hotel deals.
Crypto resort: The Trump Organization is planning a luxury resort in the Maldives with Saudi-backed Dar Global, using blockchain-based tokenization to raise investor funds.
Auction alert: Chetrit Group risks losing the Historic Hollywood Beach Resort and a Pompano Beach development site as lenders pursue a $22M UCC foreclosure.
📈 CHART OF THE DAY
U.S. mortgage delinquencies ticked up slightly in Q3, with serious FHA delinquencies rising notably due to affordability pressures and a cooling labor market, while conventional loans remained historically stable.
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