The current average forward NOI cap rate for Class-A multifamily apartments in your market is 5.25%.

a. You forecast that growth in your market will slow over the next year from 4% to 3% per annum. All other things remaining constant, what would you expect to happen to the Class-A multifamily cap rate in your market and why?

b. The Federal Reserves target range for the Federal Funds Rate is 5.00% to 5.25%, with an effective rate of 5.08%, up from the effective rate of 0.08% in February 2022, as part of Feds monetary tightening policy to squeeze inflation. On August 1, 2022, the 10 Year Treasury Note produced a yield of 2.60% while it is currently priced at a 3.86% yield. React to the following: It would be reasonable to expect the average cap rate for Class-A multifamily properties in my market to increase. Would any increase occure in tandem on a point-for-point basis with the increase in the risk-free interest rate? How does the liquidity premium react at different points in the cycle and how does it help answer this question? In answering this question, provide your understanding of the components of a cap rate.