Multifamily continues to deliver the strongest performance in the commercial property universe, but the real story is what may unfold in 2026 as financial headwinds ease and cap rates finally begin to compress.

Multifamily still leading:

The sector posted a 5.48% annual return in Q3, once again outperforming the NCREIF All Property Index—its sixth consecutive year of doing so. Investor appetite remains healthy, and Core/Core Plus cap rates edged down to 4.94%, suggesting the market is stabilizing even as some property types saw slight increases.

Regional standouts:

West Coast metros dominated the performance rankings. San Jose (9.3%), Orange County (8.5%), and San Diego (8.1%) all benefited from tight inventory and tech-sector demand. In the Sun Belt, Houston (9%) and Miami (8.4%) impressed, while Austin (2%) and Raleigh (4.3%) struggled with new supply coming online.

Mixed picture elsewhere:

The Midwest and Northeast produced a range of outcomes. Chicago delivered roughly 8% returns and suburban Maryland hit 8.7%. Washington, D.C. (7.7%) and Boston (7%) remained solid performers. New York lagged at 6.3%, weighed down by regulation and a slower recovery. Minneapolis trailed at 4.1%.

Cap rate compression ahead:

According to First American’s Multifamily PCR model, market fundamentals point to a cap rate closer to 5.1%, compared with the 5.7% average recorded in Q3. That 60-basis-point delta reflects temporary market stress—tight credit, elevated debt costs, and ongoing distress—which are expected to unwind gradually into 2026.

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Why cap rates are poised to fall

Three forces are converging to pull yields—and cap rates—lower:

• 1. Distress clearing out: More distressed trades mean pricing resets and healthier transaction flow, helping values and cap rates realign.
• 2. Loosening credit: As troubled loans are resolved, lenders regain capacity, boosting multifamily financing availability.
• 3. Stable demand: Renter households rose 2.7% year-over-year, supporting absorption and steady NOI growth.

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THE BOTTOM LINE

A slow but steady recalibration is underway. As capital markets normalize and fundamentals reassert themselves, multifamily cap rates are expected to drift down—lifting asset values and broadening refinancing options. For buyers, 2026 may offer a window to enter before pricing firms up again.