Blog: Class A Discount Rates and Caps in Today's Market?


Cap rates are comparable to a stock's multiple on earnings, inversed. If you take a property's trailing net operating income (effective revenue less operational expenses), and divide it by the market cap rate, you will arrive at the property's valuation.


Let's revisit the definition of a discount rate:


The discount rate reflects the annual unlevered hurdle i.e. return investors demand in the marketplace. Investor psychology cannot be understated here because capital flows and yield requirements are driven by investors' future expectations across various asset types. It's accurate to say that the discount rate is an amalgamation of inflation and growth expectations.


There are a few ways to calculate discount rates. As one measure, investors can apply a spread acting as a risk premium over the risk free rate on the long-end of the curve (10 Year US Treasury). This implies the prospective asset is being financed with long-term 10 year debt. While it can be argued that BBB Bonds are a better proxy, residential housing is special in that it is the only asset class in CRE that has an open, stable, liquid credit market backed by the government. Since Fannie Mae, Freddie Mac, and HUD, lend to apartments in all market cycles, that liquidity helps sustain values and supports some sort of a protective pricing floor relative to other asset classes.


Long-term, permanent debt on multifamily assets most commonly come from these GSE's, Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development. These loans are generally priced over the the treasury that corresponds with their term. The 5 year treasury is used as as the risk free benchmark for a 5 year perm loan, just as the 7 year treasury is used as the risk free benchmark for a 7 year loan, and so on. Life insurance companies and banks are the other traditional permanent debt loan providers although they have retracted in a material way over the past 24 months.


For this example, we are assuming 10 year fixed rate financing on a stabilized class A multifamily asset.


Discount rate = risk free rate + risk premium


Investors need to be compensated for taking on the risk of investing in real estate, relative to their opportunity costs and taking into account inflation. Generally speaking, the risk free rate prices in inflation expectations.


If we take today’s 10 year treasury yield of 4.03% and add 180 bps of spread (historical multifamily spread proxy over long risk free rate) we arrive at 5.83%. BBB bonds (another relative benchmark) are around 100 basis points higher than 4.03% as of early October 2024, but the 10 year T-Bill can be viewed as a more accurate historical correlation proxy for multifamily housing valuations due to the reasons mentioned above.


To determine pricing, we need to understand the other half of inputs for total returns. Now that the income side of the equation is covered, let’s talk growth. We’re missing growth expectations since cap rates are a sole mechanical measurement of income at a certain point in time. Valuing real estate based on its income stream alone is inaccurate since it is generally prone to capital appreciation and serves as an inflation hedge.


If you factor in growth expectations of 1.5% (subjectively speaking), theoretically, investors would be willing to pay 4.33 cap rates for newer vintage, stabilized residential product in growth markets today. Back in June, PE giant KKR paid $2.1B for 18 apartment complexes in the sunbelt, equating to a cap rate in the low 4s. Roughly $400k+ per unit.

Building to Hold vs Building to Sell

By Christian O'Neal • July 31, 2025
Why Building and Holding Real Estate for the Long- Term Delivers Superior, Tax-Efficient Yield 

Rent Control - Does it Work?

By Christian O'Neal • July 31, 2025
Rent Control: A Well-Intentioned Policy That Misses the Mark In the debate over affordable housing, few policies stir as much emotion—or controversy—as rent control. Advocates see it as a way to shield tenants from rising rents. Critics argue it does more harm than good. When you examine the economic evidence and real- world outcomes, the conclusion becomes clear: rent control is a deeply flawed solution to a real problem. What Is Rent Control? Rent control is a policy that limits how much landlords can increase rent, either through caps tied to inflation or fixed annual percentages. On paper, it sounds compassionate: protect renters from displacement and make cities more affordable. But in practice, rent control reduces the supply of available housing, discourages new development, and often hurts the very people it's meant to help. Why Rent Control Backfires 1. It Discourages New Construction Developers are less likely to build in markets where future rent growth—and thus returns—are capped. Why take the risk of developing multifamily housing in a city where your upside is limited and your operating environment is politicized? 2. It Drives Property Owners Out of the Market Faced with strict rent regulations, landlords may convert rental units to condos or remove them from the market altogether. Fewer units mean more scarcity, which ultimately drives prices higher for everyone else. 3. It Distorts Housing Allocation Rent control encourages long-term tenants to stay in apartments they might otherwise outgrow or vacate. This locks up valuable housing stock and prevents more dynamic turnover, often freezing lower-cost units in place for higher-income tenants. 4. It Creates a Two-Tiered Market Markets with rent control often develop into two separate ecosystems: regulated apartments that are underpriced and hard to find, and unregulated units with inflated prices to compensate for suppressed supply. The California–New York Split: A Tale of Two Approaches Historically, California and New York have been peers in over-regulating rental housing. But recently, they’ve taken different paths: California's Recent Steps Forward:  Voters rejected rent control expansion (Prop 21 and earlier Prop 10)  Streamlined approvals and reduced CEQA abuse to promote new development New York's Recent Moves Backward:  Passed “Good Cause Eviction” law—effectively rent control in disguise  Political calls for rent freezes and demonization of landlords If you’re an open-minded apartment developer evaluating both markets today, California’s message is increasingly: We need you. New York’s? Not so much. To be fair, both are still difficult places to build housing, and cities like Los Angeles and Berkeley remain deeply anti-development. But California has shown progress by recognizing that you can’t claim to be pro-housing while simultaneously vilifying those who create and operate it. A Misalignment of Incentives A core problem with rent control is that it treats housing supply as fixed and ignores the private sector's role in expanding it. If developers and operators are stripped of potential upside—and burdened with unpredictable political risk—they simply stop building. Even well-intentioned pro-development plans (like NYC’s "City oare undermined when operators believe they’ll be punished after delivery through hostile regulation or public scorn. You can't be truly pro-development unless you're also pro-operator. Policies that foster collaboration, not scapegoating, create the conditions for long-term affordability. The Real Way Forward Instead of imposing artificial caps, cities should focus on increasing housing supply through zoning reform, expedited approvals, and public-private partnerships. The more units that come online, the more pricing power shifts away from landlords and toward tenants—naturally. Rent control is seductive in its simplicity but devastating in its consequences. It’s a policy that tries to solve a supply problem with demand-side restrictions—and in doing so, it often makes things worse. At Alpha Equity Group, we believe that smart, sustainable development is the key to housing affordability. And that requires sound economics, not political theater.

Into the Future – Making Sense of Rates in a World That Doesn’t

By Christian O'Neal • June 24, 2025
In the world of capital markets, clarity is often fleeting — and today, it feels downright elusive. The Federal Reserve’s latest June dot plot offered little in the way of certainty. While the median projection sees the Federal Funds Rate in the mid-3% range by the end of 2026 , the dispersion among voting members is striking. Seven members predict no rate cuts in 2024 , reflecting just how divided the committee remains in the face of conflicting data. This latest update marks a 25-50 basis point shift downward from May , but the overarching theme is one of caution, not conviction. That sentiment is mirrored in the economic projections. Core PCE inflation , the Fed’s preferred inflation measure, is now expected to end 2025 at 3.0% , 30 basis points higher than earlier forecasts. Meanwhile, real GDP is forecast to slow from 2.3% in Q4 2024 to just 1.7% in 2025 — another sign that the lagged effects of monetary policy are expected to begin to show. At the same time, the Fed’s balance sheet has shrunk dramatically, from a peak of $9 trillion in April 2022 to just $2.3 trillion today . That quantitative tightening, coupled with a lack of consistent inflation suppression, leaves both equity and bond markets vulnerable to further volatility. This all feeds into an uncomfortable truth: rates are likely to remain higher for longer , and the market is struggling to price that reality. The VIX index , a 30-day forward-looking gauge of volatility in equities, is trending higher. When volatility rises even as indices fall, credit spreads widen , liquidity tightens, and financing risk surges. For commercial real estate investors , this has enormous implications. As we explored in our recent article on CRE Price Discovery , the market remains in flux. The bid-ask spread in real estate is still somewhat wide, and most transaction activity today is being driven by maturing debt — not opportunistic investments banking on future growth. This means valuations are being forced downward, especially for assets that were purchased or refinanced at ultra-low rates in 2021–2022. Consumer behavior is also in transition. Household formation is slowing, and personal savings rates are slowly ticking up although they are significantly down from longer term averages – which could reflect folks bracing for economic turbulence. U.S. household formation currently stands at 1.058 million, down 7.68% from last month’s 1.146 million and down 47.73% from 2.024 million a year ago. Looking globally, demand for U.S. Treasuries remains a critical economic indicator that has trickling effects on the economy . A strong bid-to-cover ratio — like the 2.67x seen at the June 11th 10-Year Treasury auction , with nearly 88% of bids from foreign banks — is encouraging. It suggests continued faith in U.S. fiscal credibility and currency strength despite market apprehensions in our strength, such as the US credit rating being downgraded by Moody’s. This equilibrium is rather fragile. Should the U.S. continue to run massive budget deficits with a debt-to-GDP ratio north of 120% , investors may begin to demand higher yields — or worse, seek refuge in alternative stores of value. Gold is one such store. The World Gold Council recently reported that 76% of central banks expect to increase their gold holdings over the next five years , up from 69% in 2023. This flight to real assets reflects growing concern about the long-term value of fiat currencies — and a desire to hedge against systemic risk. The Bottom Line  Rates are likely to remain high through 2025 and into 2026 Inflation remains persistent but progress has been unclear Growth is slowing, and volatility is rising Real estate is repricing around debt maturity events Global capital is shifting cautiously, looking for safety At Alpha Equity Group, we believe this is a time for discipline, not risk-taking. We’re staying patient, watching the data, and investing defensively — focusing on secured debt positions and capital preservation. While others chase uncertain upside, we’re building long-term value through downside protection while we wait out the convergence of dozens of factors completely outside our control.
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