Boston-area banks and investors see apartments as strong investment for 2025, but think it’s unlikely the region will follow the expected drop in multifamily cap rates this year, in part because they’re already so low. iStock photo

While multifamily cap rates are sent to decline nationwide, Greater Boston is more likely to see stagnation, according to local experts – but that might not be a bad thing.

According to economists at real estate title insurance firm First American, cap rates in the multifamily cap rates are set to decline in 2025 according to a model the company has built. If it happens, it would be a major shift compared to this time last year, when cap rates were on the rise.

A property’s cap rate, short for “capitalization rate,” is a useful metric when looking at how risky an investment is. The metric indicates the rate of return that can be expected to be generated from a property.

They’re also an indicator of how much investor interest there is likely to be in buying or developing new properties in a market.

“Cap rates have been holding at around the 5 percent range for the last 18 months, and I think that’s a pretty low cap rate,” Kevin Malone, senior vice president and senior commercial lender at Chelsea-based Metro Credit Union, said. “I think it reflects investors feeling about the robustness of the marketplace, the safety of the asset overall, from an investment standpoint.”

Multifamily No Better ‘Safe Haven’

At a time when Greater Boston bankers and real estate investors, alike, are looking for safe places to place investments with the office sector still troubled and the industrial and biotech sectors both seemingly overbuilt, multifamily developments are one of the few options left.

“I think that the fact that there’s no other asset class that can compete in terms of safe haven,” Eastern Bank Chief Credit Officer Matthew Osborne said. “I don’t think they’re going up on multifamily at worse they’ll stay the same, but they’ll probably compress a little bit.”

With vacancy sitting at 5 percent or less in the multifamily market, Malone believes the market is quite stable, which can be credited to the diverse nature of the Boston market as a whole.

“If you’re an investor in that product, you should be very happy,” Malone said. “We’re pretty bullish about multifamily even though that’s a very significant concentration for most banks in the Greater Boston area and credit unions. So, we manage it closely, but we’re pretty optimistic.”

Other local experts are slightly more cautious when it comes to the Boston market. The common thread in their responses: While multifamily cap rates are unlikely to rise, it is more likely that rates stagnate with the potential for some compression.

Uncertainty Lingers, Thanks to Trump

Osborne and Malone both noted that interest rates will play a major factor in the direction of cap rates. With the interest rate on 10-year Treasurys increasing instead of decreasing towards the end of 2024, and the Federal Reserve signaling it won’t cut its benchmark interest rate more than twice, the cost of debt remains high.

Glen Seidlitz, managing director at Boston-based investor and developer Helge Capital, isn’t as confident that rates will go lower due to uncertainty regarding the return of President Donald Trump to the White House.

“What we’ve seen, as the prelude to a second Trump presidency, has been The Fed didn’t react the way we thought they would. They’re also projecting fewer rate cuts going forward, and we still have an unanswered question of what Trump economic policy is going to do to the economy,” he said. “That uncertainty is back again, and that uncertainty is not good for the real estate capital markets.”

With that uncertainty, Seidlitz noted that it is likely local multifamily cap rates stagnate instead of seeing a reduction.

“Boston has always had strong fundamentals and lower cap rates, generally speaking, than most other U.S. markets,” he said. “There’s some West Coast markets that probably had similar low cap rates, but in general, it’s been a very low cap rate market. The overall cap rate environment will still remain low compared to the U.S., but I don’t see it being back to sub-4 percent cap rates.”

During the pandemic, cap rates reached unheard-of lows, sending investors – some of them inexperienced – racing to outbid each other for existing apartment properties across the country.

Will Loan Demand Grow?

Heading into 2025, there is still some uncertainty regarding the expectation for loan demand in the multifamily market. Seidlitz believes that there will not be a large number of new loans due to the number of transactions currently taking place but the demand for refinancing and recapitalization will be strong.

“I think you’re going to see a lot more lenders just extending their terms, because the solutions aren’t great, unless the lending community in Mass. and even within their own individual portfolios decides that they want to start foreclosures on a lot of borrowers who are otherwise making debt service payments – which I don’t ever see happening,” he said. “I think there’s distress in other areas that are taking precedent to that. So, you’re more than likely to see a continued extension of terms than you are an increase in foreclosures.”

Sam Minton

But cap rates aren’t the only factors that affect loan demand. Malone noted how a borrower’s capacity to service new debt can a play a role in the ability to make a deal actually go through.

“If rates don’t come down, you still have to meet a debt service component of pretty much every financial offering from a financial institution, a credit union or a bank, and I’d say that’s probably the biggest constraint,” he said. “So even if cap rates come down, you still need to make the product work on a cash-flow basis.

Even with optimistic investors who hold a bullish view on the market and are willing to pay a lower cap rate, the numbers still need to add up in order for a deal to reach fruition, he said.

But Greater Boston, and Massachusetts as a whole, continues to deal with a housing shortage, leading for some optimism that demand will be higher than it was in 2024.

Eastern Bank’s Osborne noted that, with the expectation that there won’t be large multifamily cap rate increases, assumptions can be made on the direction of the market. While it can be difficult to underwrite your cost of capital, he added, lenders have the ability to underwrite rent growth despite questions about how much more local renters will be willing to pay.

“That actually helps people rationalize expensive purchases, because they’ll say ‘Well, maybe I’m not making a great return this year, I will be able to make it the next year or two,’” he said.