The Exit Cap Fallacy: Why Canadian Multifamily Valuations Deserve More Humility

Confidence at Exit Became a Habit

One of the most persistent assumptions in Canadian multifamily underwriting over the past decade has been confidence at exit. Entry pricing may be debated, financing may be stressed, and rent growth may be moderated, but the terminal value almost always arrives with quiet certainty. Exit cap rates are typically set just low enough to make the numbers work, supported by familiar justifications: long-term housing shortages, demographic growth, or the perceived defensiveness of rental housing. For years, declining interest rates and abundant capital rewarded this confidence. Even deals with limited operational upside benefited from multiple expansion, and that experience shaped underwriting habits that have proven difficult to change. What made this mindset particularly durable was how rarely it appeared to fail. Exit assumptions were validated not because they were carefully tested, but because the broader environment was cooperative. Capital flows compressed yields, debt remained inexpensive, and buyers were willing to underwrite future growth generously. In that context, exit pricing felt less like a risk variable and more like a given. The problem is not that this approach was irrational at the time given the circumstances, but that it became normalized. As conditions change, habits formed in one market can quietly undermine decision-making in the next.

Why Exit Caps Matter More When Growth Slows

The issue with exit assumptions today is not that they are optimistic, but that they are often unexamined. In a market where rent growth has slowed and capital has become more selective, projected returns increasingly depend on factors that sit beyond the owner’s control. A deal that assumes modest income growth but relies on cap rate compression is still a growth-dependent deal, it simply defers that dependence to the final year of the model. In many underwriting scenarios, a 50-basis-point shift in the exit cap explains the majority of the projected IRR, yet this sensitivity is rarely treated with the same seriousness as debt terms, expense growth, or lease-up assumptions.

This risk becomes more pronounced when stability is used as a substitute for analysis. Many assets are marketed as “fully stabilized,” implying predictability and safety. But stability at today’s NOI does not guarantee stability at tomorrow’s valuation multiple. If income growth is limited and exit pricing assumes a receptive market, the stability being underwritten is present-tense rather than forward-looking. Arguments about long-term housing shortages may still be valid, but they operate on timelines that do not always align with a five-year hold. Markets can remain rational longer than a deal’s duration allows, and underwriting needs to reflect that mismatch rather than ignore it.

There is also a tendency to anchor exit assumptions to historical averages or past cycles, as though those benchmarks provide protection. History offers context, not certainty. Exit pricing is shaped by capital markets, interest rates, and investor sentiment, but these are factors that move independently of asset quality in the short to medium term. When growth slows and capital becomes more discerning, exit pricing stops being a background assumption and becomes the fulcrum on which outcomes turn.

Underwriting with Humility Rather Than Certainty

The discipline now lies in treating exit caps as a risk variable rather than a foregone conclusion. When we underwrite deals today, we want to understand how returns behave if exit pricing is flat to entry, or modestly wider. We want to see whether value creation is driven by controllable improvements such as operational efficiency, expense management, and thoughtful capital deployment, rather than by an assumed re-rating of the asset at sale. Deals that only work if the market becomes more generous over time are not conservative, regardless of how stable they appear at acquisition.

The deals that tend to hold up under this analysis share common traits. Leverage is moderate rather than maximized. Income assumptions are grounded in current leasing realities rather than extrapolated from prior cycles. Entry pricing reflects present conditions rather than future optimism. These deals may not lead the market on projected IRR, but they offer something more durable: returns that do not depend on benevolent exit conditions.

None of this suggests that Canadian multifamily has lost its appeal. Demand for rental housing remains strong, and long-term fundamentals are intact. But cycles rarely announce themselves with clarity. They reveal themselves through slower rent growth, tighter credit, and more selective capital. In that environment, humility becomes a competitive advantage. Exit caps should not be treated as destiny; they should be treated as uncertainty. Investors who recognize that distinction, and underwrite accordingly, are better positioned not just to protect capital, but to compound it through the next phase of the cycle.