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In most underwriting reviews I run, the exit cap rate gets less scrutiny than almost any other assumption in the model, and it does more to decide the outcome than any of them.
Investors will ask hard questions about rent growth. They will push on expense ratios, on renovation timelines, on debt terms. These all important matters to review and stress test for sure. However, they often move past the “exit cap rate: 5.00 percent, in line with entry”, satisfied that the assumption is conservative because someone wrote the word conservative next to it.
That is the false comfort. Conservative is not a description. It is a claim, and the claim needs a mechanism behind it.
What Conservative Actually Requires
An exit cap rate is not a fact about the future. It is a forecast of what a buyer, five to seven years from now, will be willing to pay for the income the property is producing at that time. Nobody underwriting a deal today knows what interest rates, capital flows, supply-demand dynamics, or investor sentiment will look like at exit. The honest position is humility about that number, not false precision, and certainly not silence.
The question that actually tests the assumption is narrower than whether the exit cap is conservative. It is: what has to be true in the market for this exit cap rate to hold, and what does the return look like if it does not.
The question I hear most often is how much to expand the exit cap by, and there is no formula that answers it honestly. Most models default to roughly 10 basis points of expansion per year of hold, so a five-year deal lands at 50 basis points over entry. That default is a habit, not an analysis. The right number depends on where the rate cycle sits today, not on a rule built for a different environment. In 2021 and 2022, when the ten-year Treasury sat near historic lows, 200 basis points of assumed expansion would have been the conservative position, because rates had far more room to rise than to fall. Today, with rates sitting at or near a cyclical peak, 50 basis points is not an unreasonable base case, because the room for further increase is narrower than it was three years ago. The number is not the point. Knowing which rate and market environment you are underwriting in, and being able to say why, is.
What the Sensitivity Actually Shows
I reviewed a deal for a family office client, identifiers changed, where the sponsor had modeled an entry cap rate of 5.25 percent and an exit cap rate of 5.00 percent in year five: 25 basis points of assumed compression built directly into the return. The justification, when I asked, was that the submarket had strong population growth and the sponsor expected continued investor demand.
Neither of those is a mechanism. Population growth does not compress cap rates. Capital availability, interest rate direction, and the relative attractiveness of multifamily against other asset classes compress cap rates, and none of the three had been addressed.
Run the sensitivity and the picture changes quickly. On a property with a modeled year five net operating income of two million dollars, holding the exit cap flat at the entry rate of 5.25 percent, instead of the assumed 5.00 percent, would reduce the projected sale value by roughly two million dollars. Let it expand another 50 basis points, to 5.75 percent, and the reduction would be closer to five million dollars. On a deal levered at 65 to 70 percent, that is not a rounding error in the return. It is the difference between a projected equity multiple the sponsor is proud of and one the sponsor would rather not discuss.
This is not a hypothetical risk sitting in a stress test nobody expects to use. According to CBRE’s H1 2026 U.S. Cap Rate Survey, the all-property average cap rate held essentially flat during the first half of 2026 and with expectations to increase as the ten-year Treasury yield climbed to 4.67 percent, a gap that historically does not persist indefinitely. The same survey identifies infill multifamily as one of the more bearish subtypes going into the second half of the year, with cap rate expansion expected to be strongest for lower-quality assets. A model that assumes stability, let alone further compression, is taking a market position, whether or not the sponsor frames it that way.
The Question To Ponder On
When evaluating a deal, ask the sponsor to show the sensitivity table: what the return looks like at the modeled exit cap, at the entry cap held flat, and at 50, 100, 150 and 200 basis points of expansion beyond that. If the sponsor has not run that table, they have not stress tested the assumption carrying the most weight in the deal. If they have run it and will not share it, that tells you something too.
Before the next deal crosses your desk, when evaluating exit cap rates, ask what has to be true in the market for it to hold, and what the return looks like on the days it does not.
Vessi Kapoulian
Breaking down multifamily underwriting one step at a time to create educated and empowered investors
P.S. If you would like a second set of eyes on a deal or want to sharpen your underwriting through a risk lens, feel free to connect with me.
P.P.S. And if you want to go deeper into analyzing multifamily investments step by step, my Mastering Multifamily Underwriting book and the Mastering Multifamily Underwriting program walk through this process in plain English, from acquisition to exit.