The multifamily market is in the late stages of a prolonged expansion, and capital sources continue to put money into the sector although industry experts say internal rates of return are declining.

“Capital, especially debt, is extremely available — so is equity, and that raises prices and compresses returns,” Southlake-based Trinity Private Equity Group principal Doug Gunn said at Bisnow's Multifamily Annual Conference South. “We generally were looking for 20 to 25% internal rate of return targets because we look for a value-add or development-type deal. We are now thinking that between 15 to 20% return is more realistic going forward.”

To be sure, plenty of equity is looking for yields and a place to land, Walker & Dunlop Managing Director Stuart Wernick said. He and others spoke on the state of multifamily financing during the conference.

“There is not only capital here in the U.S. but all over the world,” Wernick said. “The yields they are getting in Europe and overseas are not what they can find here so that is why they are still coming here, and quite honestly we have a strong economy.”

Nationally, rent growth has slowed to an annual pace of 2.3% as of midyear, an eight-year low, according to multifamily research firm RealPage, which notes that several large markets are registering essentially flat rents. Dallas-Fort Worth and Austin are among the rent-change laggards as new supply tamps down those markets. Rents in the second quarter in Dallas were up just 0.8% over the year-ago period and in Austin they were flat, RealPage said.

Ned Stiker, senior managing director of Atlanta-based apartment operator Cortland Partners, said the net costs of lending have gone up but not as much as the Federal Reserve has raised rates.

“Paradoxically, if you are a debt provider, rising rates give you a buffer to cut your spreads because you are actually still achieving higher overall rates of return on your lending,” he said.

Stiker said with cap rates coming down, the carry advantage and cash-on-cash returns in the early stages of a project have decreased dramatically, providing little advantage to financing with debt. That means more investors/developers will opt to pay cash for deals or use less debt.

“That will eventually soak up the amount of capital that is available a little more quickly just because you are going to put out more equity per deal, but that process will take awhile,” he said.

Allied Orion Group CEO Ricardo Rivas said the company recently took a Houston property off the market after its best offer fell $1M short of its minimum asking price.

“What made that decision easier was the availability of debt,” Rivas said.

Allied Orion Group received several offers to refinance the property with interest rates from 3.75% to 5.25% that came from several sources, he said. It opted for an interest-only five- to seven-year CMBS loan.

Several speakers noted that bridge loans in the multifamily space are on the rise. These short-term loans are often used to help transition an asset such as a value-add property.

Because cap rates have been compressed, investors have started to lean toward bridge loans to finance acquisitions and renovations. However, with the slowdown in rent increases, developers will need to be careful as they look at positioning their assets for a future sale as IRRs are coming down as rent growth slows.

“We can’t pencil in anything over 17 [IRR]," Rivas said. “Unless we are drinking a lot of Kool-Aid, then it’s a 25.”