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CAP Rates for Apartment/Multifamily Properties in Charlotte North Carolina

Multifamily Apartment Cap Rates
Rates as of: 05/25/2024
Description Cap Rate
Luxury Metro A Class 5.10
Luxury Metro B Class 5.15
Luxury Metro C Class 5.60
Suburban A Class 5.25
Suburban B Class 5.35
Suburban C Class 5.75
Value Added Acquisition 6.65
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Multifamily Apartment Cap Rates

Video about HUD Multifamily Loans

October 2023 Multifamily Cap Rate Report

By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice, member of The Forbes Business Council

Multifamily Cap Rates are Expanding

The good news for apartment building investors is that multifamily cap rates have gone up slowly from the third quarter of 2022 to the third quarter of 2023 expanding 44 bps, from 4.63% to 5.07% according to CBRE. This has effectively lowered the average sales price on a $1 million property over the year by 8.8% or $88,000. As multifamily investors are welcoming lower sales prices, they are being hammered by rising interest rates that lower returns on their investment to unacceptable levels. Most of my borrowers are faced with having to negotiate a lower sales price or canceling the purchase after I size their loan and tell them they have to put 50% down. A year ago, this would have been 44%. At the beginning of 2022 our average multifamily borrower had to put about 35% down.

Multifamily Sales Volume and Loan Volume are Down

Multifamily sales volume and loan volume are at historical low levels. Cap rates need to rise a good deal more and interest rates need to come down before the commercial real estate market can recover. Rising interest rates that peaked at just under 8.00% at the end of October have collided with high multifamily prices further slowing down both purchases and loan originations. According to MSCI Real Capital Analytics, sales volume reached $89.6 billion through the first three quarters of 2023, which was considerably down from the $251.9 billion recorded during the same period of 2022.   According to the Mortgage Bankers Association, multifamily loan originations were down by 49% from the previous year at the end of the third quarter 2023. As a commercial mortgage banker, our multifamily loan volume is down by over 70% this year. 

 

Demand for Apartment Rentals is High

Multifamily cap rate expansion is being slowed by the high demand for multifamily rentals. High mortgage rates have pushed many would be home buyers into the rental market. According to Redfin, a home buyer now has to earn $114,627 annually to afford the medium priced home at $420,000. This puts their monthly payments 27% higher than rent on the average apartment. According to Cushman and Wakefield, demand for apartments for the third quarter 2023 was 89,280 units which was an 11% increase over the prior quarter but six times above last year’s third quarter increase of 13,000 units. This is also a result of economic strength in jobs and low unemployment.

Rent Growth is Down and Vacancy and Concessions are Up

High vacancy and slow rent growth are two metrics that historically have increased cap rates. This trend should create more cap rate expansion over the next year. According to Cushman and Wakefield, vacancy rates nationally have gone up over the past year from 6.5% to 7.8%. According to Fannie Mae, Annual rent growth through October of 2023 has decreased to 2.6% due to over 400,000 new units flooding the market out of the 730,000 new units expected to come on line in 2023. This is very low rental growth if you compare it with combined rental increase of close to 20% for 2021 and 2022. Most of the new supply of units were in high amenity A class complexes. This has effectively kept A class rental rates flat with high concessions. Rental concessions over all classes increased from 5.2% to 9.00% from a year ago. The average rental concession is one month free on a 12-month lease.

Should you Wait for Cap Rates to Go Higher to Purchase?

In my opinion, although cap rates have gone up, they are still unrealistically low when combined with today’s high mortgage rates, making investing risky. Ideally, commercial property values should increase based on rental growth, and not because low interest rates which bottomed out at 2.96% in December of 2021 made it possible. Sound economics just do not support today’s cap rates based on what investors need to earn. The average cash on cash return with 50% down is hovering around 4.20% after loan payments. Many of  my clients have told me they can earn 5.25% investing in CDs. Why should they buy rental property today with those numbers? And sure, many sellers and their real estate brokers will try to sell you in the operating memorandum that rents are under market. But are they with rental increases calming down? My advice is to wait until sometime in 2024 with the hope that interest rates will come down a lot along with sales prices. Hope that this additional time is not friendly to sellers who have to sell.  Over the past 26 years doing this job, I have made many loans on properties that came up for sale at lower prices due to loan maturity, economic hardship, divorce or death. 

                                                         

Sources

CBRE: https://www.cbre.com/insights/briefs/higher-rates-push-up-prime-multifamily-cap-rates-in-q3

Fannie Mae: https://www.fanniemae.com/media/49331/display

MBA:  https://www.mba.org/news-and-research/newsroom/news/2023/11/07/commercial-multifamily-borrowing-down-49-in-third-quarter-2023

Cushman and Wakefiled: https://cw-gbl-gws-prod.azureedge.net/-/media/cw/marketbeat-pdfs/2023/q3/us-reports/multifamily/us_multifamily_marketbeat_q3-2023.pdf?rev=951e0cd95c77403cbc6c67609f5e17b8

 

MSCI: https://www.msci.com/research-and-insights

Redfin: https://investors.redfin.com/news-events/press-releases/detail/987/redfin-reports-that-homebuyers-must-earn-115000-to-afford#:~:text=Press%20releases-,Redfin%20Reports%20That%20Homebuyers%20Must%20Earn%20%24115%2C000%20to%20Afford%20the,the%20Typical%20American%20Household%20Earns

 

 

 

DON’T FALL INTO THE CAP RATE TRAP

“Are you kidding me?” my client asked.  “You’re telling me that the property taxes are going up by $19,500 when the county reassess the property I’m buying based on the purchase price after I own it?”

“Yes”, I answered.  “In California they do that.” 

“Well then”, he said, “ that means I’m buying the property for a 4.70 cap instead of the 6 cap the listing agent said it was. That means I’m getting ripped off and the listing agent lied to me. Why would he put the seller’s lower property taxes in the list of expenses and calculate a 6 cap? This is the only property I’ve identified in my 1031 exchange.  What am I going to do?”     READ MORE

About the Charlotte, North Carolina Real Estate Market in 2024

The Median household income of a Charlotte resident is $53,274 a year.

In Charlotte, NC, $212,100 is the house worth median. There has been an increase in the value of homes in Charlotte in the last year of 8.9 percent. Regarding the following year, it has been forecasted that the value of houses will increase 6.5 percent.

Per square foot, the list cost median is $144 in Charlotte. The Metro Area of Charlotte-Concord-Gastonia Metro has a lower per square foot list cost median of $129.

$285,000 is the cost median in Charlotte for homes presently listed. As far as rent costs go, Charlotte has a rent cost median of $1,445. Charlotte-Concord-Gastonia Metro Area has a slightly higher rent cost median of $1,450.

When it comes to the real estate economy, an important ingredient is the foreclosure rate. The foreclosure rate can have a big impact on the value of homes.

The lower the foreclosure rate, the higher the home value. If the foreclosure rate is super high, the value of real estate could go way down. If the value of real estate goes far down throughout much of the nation, we could be in a recessionary period.

In Charlotte, North Carolina, for each 10,000 houses, 2.0 houses are foreclosed. The Metro Area of Charlotte-Concord-Gastonia Metro has a lower rate of foreclosure which is 1.4 houses foreclosed for each 10,000 houses. The United States of America has a foreclosure rate of 1.6.

When a homeowner is on their way to foreclosure, there is a first thing that happens. It is mortgage delinquency. What is meant by mortgage delinquency? Mortgage delinquency is the condition of a homeowner missing a payment on their mortgage.

Charlotte has 1.8 percent as the percentage of mortgage delinquencies. This is higher than the mortgage delinquency rate of the United States which is 1.6 percent.

The recession in the year 2008 wreaked havoc on the real estate economy as well as the economy as a whole in the United States. It caused the value of homes in our nation to drop more than 20%.

This caused many homeowners to presently be underwater regarding their mortgages. What does it mean to be underwater on a mortgage? It means that the value of a home is less than the mortgage debt of the home.

10.3% is the percentage of homeowners in charlotte who are underwater on their mortgages. The Metro Area of Charlotte-Concord-Gastonia has a lower underwater rate of 8.0 percent.

We are now moving on to Charlotte North Carolina commercial real estate. We are going to cover a little about two areas:

1. The office market of Charlotte

2. The trend of tenants moving downtown to live

Regarding the Charlotte office market, leasing has gone back to more normal levels after a very strong quarter. In the most recent 4 quarters, 3.8 million square feet of space has been leased by tenants.

There was a 20 basis point drop from the first quarter in availability in the market. 15.2 %. There was also a drop to 18.8% in availability of Class A, a decline of 40 basis points.

Quarter over quarter the asking rent price increased 0.6 percent. This was an increase to $26.09 per square feet. Quarter over Quarter the asking rent price of Class A properties went up 0.9 percent. This was an increase to $28.72 per square feet.

During the last 6 month period through May of 2018, there was a big drop in sales of office property. The total sales during this period was $426 million. This was a drop of 44% when you make a comparison to the previous six month time period in which $756 million was sold.

Now, when it comes to the trend of tenants moving downtown to live, they like the new option of living in factories and warehouses that have been converted into living spaces. They also like the CBD that has groundup construction.

Some companies want suburban office parks as an option for locations which is a change in the suburbs to urban core that exists in so many big metro areas in the United States.

In the Charlotte suburban areas, developers are emphasizing that these suburban areas are a place to live-work-play at. And it looks like it’s working out well. Not only are tenants within the region moving to them, but also employers are moving from other markets to the region which benefits these projects.

For a great source to find out more about apartment real-estate in Charlotte, go to http://www.biggerpockets.com/

Apartment Loan Store is proud to serve the entire Greater Charlotte area:

  • Concord
  • Gastonia
  • Rock Hill

U.S. National-Level CAP Rates and Expected Rates of Return by Property Type, Sector, Class and/or Segment

   

Stabilized Property Acquisitions

Value-Add Property Acquisitions

   
CAP Rate
 
AD Over 10-Yr Treasury
Expected Return on Cost 
 
AD Over 10-Yr  Treasury
Property Type
​Sector
Class/
Segment
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017 (%)
EOP 1.49
H2 2017 (%)
EOP 2.45
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017(%)
EOP 1.49
H@ 2017 (%)
EOP 2.45
Office
CBD
ALL 6.61 6.63 2 512 418 8.22 8.24 2 673 579
AA 5.19 5.24 5 370 279 - - - - -
A 5.95 5.99 4 446 354 7.12 7.10 -2 563 465
B 6.85 6.84 -1 536 439 8.02 8.03 2 653 558
C 8.61 8.64 3 712 619 9.83 9.8 6 834 744
Office
Suburban
ALL 7.64 7.76 11 615 531 9.21 9.33 11 772 688
AA 6.20 6.31 11 471 386 - - - - -
A 6.96 7.07 11 547 462 8.06 8.18 12 657 573
B 7.97 8.13 16 648 568 9.20 9.27 7 771 682
C 9.30 9.46 16 781 701 10.45 10.60 15 896 815
 
Industrial
ALL
ALL 6.72 6,73 1 523 428 7.71 7.74 3 622 573
A 5.48 5.54 5 399 309 6.34 6.41 8 485 396
B 6.59 6.52 -7 510 407 7.53 7.53 0 604 508
C 8.13 8.16 4 644 571 9.31 9.33 3 782 688
 
Retail 
Neighborhood
Community
ALL 6.94 7.12 18 545 467 7.92 8.14 22 643 569
A 5.62 5.66 4 413 321 6.59 6.85 26 510 440
B 6.83 7.03 20 534 458 7.81 8.00 19 632 555
C 8.39 8.68 29 690 623 9.36 9.58 22 787 713
Retail
Power
ALL 7.36 7.54 18 587 509 8.25 8.47 22 676 602
A 6.11 6.16 5 462 371 7.21 7.31 10 572 486
B 7.30 7.47 16 581 502 8.06 8.40 34 657 595
C 8.70 9.03 33 721 658 9.52 9.74 22 803 729
Retail
High Street
                     
A 4.23 4.37 13 274 192 - - - - -
                     
 
Multifamily
Infill
ALL 5.26 5.32 6 377 287 5.95 6.03 8 446 358
A 4.60 4.67 8 311 222 5.34 5.41 7 385 296
B 5.15 5.20 5 366 275 5.78 5.87 9 429 342
C 6.06 6.12 6 457 367 6.75 6.81 7 526 436
Multifamily
Suburban
ALL 5.67 5.74 7 418 329 6.33 6.45 11 484 400
A 5.01 5.10 10 352 265 5.62 5.71 9 413 326
B 5.53 5.61 8 404 316 6.16 6.26 10 467 381
C 6.48 6.50 2 499 405 7.22 7.37 15 573 492
 
Hotels
CBD
ALL 7.85 7.91 6 636 546 - - - - -
LUXURY 6.83 6.92 8 534 447 - - - - -
FULL SERVICE 7.55 7.62 8 606 517 - - - - -
SELECT SERVICE 7.94 8.01 8 645 556 - - - - -
ECONOMY 9.10 9.11 1 761 666 - - - - -
Hotels
Suburban
ALL 8.39 8.44 5 690 599 - - - - -
LUXURY 7.42 7.50 7 593 505 - - - - -
FULL SERVICE 8.07 8.14 7 658 569 - - - - -
SELECT SERVICE 8.46 8.53 7 697 608 - - - - -
ECONOMY 9.59 9.58 -1 810 713 - - - - -

 

 

 

Other Cities in North-carolina served by Apartment Loan Store

  • Charlotte 
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  • Greensboro 
  • Winston-Salem 
  • Durham 
  • Fayetteville 
  • Cary 
  • Wilmington 
  • High Point 
  • Greenville 
  • Asheville 
  • Concord 
  • Gastonia 
  • Jacksonville 
  • Rocky Mount 
  • Chapel Hill 
  • Burlington 
  • Wilson 
  • Huntersville 
  • Kannapolis 
  • Hickory 
  • Apex 
  • Goldsboro 
  • Salisbury 
  • Indian Trail 
  • Monroe 
  • Mooresville 
  • Wake Forest 
  • New Bern 
  • Sanford 
  • Matthews 
  • Thomasville 
  • Garner 
  • Asheboro 
  • Cornelius 
  • Holly Springs 
  • Statesville 
  • Kernersville 
  • Mint Hill 
  • Kinston 
  • Lumberton 
  • Havelock 
  • Shelby
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HUD Loans are one of the best options with the current level of interest rates. For a complete guide to HUD Multifamily Loans please go here:

HUD Multifamily Loans - The Complete Guide