"Many investors have made note of the cap rate compression in the multifamily space. The American Council of Life Insurers (ACLI) reports cap rates on apartments with new mortgages made by life insurers have fallen, dropping from 8.9 percent in the first quarter of 2003 to 5.77 percent in the second quarter of 2013, a 35 percent decline and the lowest recorded by ACLI since the series’ inception in 1965.
"Yet Freddie Mac's chief economist Frank Nothaft said he believes housing values remain linked to market fundamentals and that cap rate compression in the multifamily sector may have bottomed.
"The decline in cap rates and growth in rents (adjusted for inflation) are key fundamentals that explain the rise in apartment values over the past decade,” said Nothaft. “Seen through this lens, the rise in property values appears to be consistent with overall economic forces, and the slower appreciation over the past year reflects the bottoming of cap rates. Cap rates are expected to gradually move higher in the coming year as long-term yields move higher, and rents are likely to outpace overall inflation, leaving apartment values firm and on solid ground."Click here to read the full story.