Abundant Capital, Economic Growth Keep Cap Rates Stable
A “wall” of domestic and global capital, economic growth and a low interest rate environment led to broadly stable capitalization rates for U.S. commercial real estate in first-half 2018, reported CBRE, Los Angeles.
“Cap rates have been held down by above-trend economic growth and continued low interest rates,” said CBRE Global Chief Economist Richard Barkham. “The wall of capital targeting real estate is bigger than it has ever been and there is some degree of difficulty in finding investments. Existing owners want to hold, and even if they are leveraged up, have the refinancing options to be able to do that. It is very competitive.”
Investors are “keen” to buy into the innovation that is taking place in real estate, particularly in the logistics and office markets, Barkham noted.
“We expect cap rates to remain stable in the second half of 2018 [because] the economy is performing very well with very modest upward pressure on inflation,” Barkham said, calling the current environment “great conditions for real estate.”
CBRE predicted continued cap rate stability in the second half of the year.
Among the major commercial real estate sectors, industrial and logistics cap rates for stabilized industrial assets fell by 10 basis points on average to 6.42 percent. “The industrial and logistics sector remains blisteringly hot and cap rates may continue to decrease in the remainder of the year, given the extremely robust market fundamentals and the tremendous institutional investor demand for industrial and logistics assets,” said CBRE Global Head of Industrial and Logistics Jack Fraker.
Office cap rates decreased slightly for central business district properties and increased slightly for suburban properties, CBRE Global President of Capital Markets Chris Ludeman said. “There is plenty of capital that wants office product, whether core or value-add,” he said. “But there are too few quality assets on the market to satisfy capital demand. If more of the product that capital wants becomes available, it would be absorbed.”
Ludeman noted markets can get “lumpy” from quarter to quarter but said commercial real estate remains attractive to investors due to its continued liquidity and sound fundamentals in a strong economy.
Cap rates increased across the board in the first half for both stabilized and value-add retail properties, CBRE said. Cap rates for stabilized grocery-anchored neighborhood/community center assets increased a “modest” nine basis points to 7.41 percent while value-add assets ticked up four basis points to 9.17 percent as pricing on core retail centers remained robust. The average cap rate for stabilized power centers increased across all class segments in most markets.
“Multifamily cap rates edged down modestly, reflecting an ongoing capital markets trend of investors moving out the risk curve to find new opportunities and greater yields,” said CBRE President of Institutional Properties and Capital Markets Brian McAuliffe. “The second-half outlook is for stable multifamily cap rates and returns on cost.”
Hotel cap rates dipped four basis points between January and June, reversing a two-plus-year trend of modest increases. Most market segments from economy to luxury and geographic areas including central business district and suburban had modest single-digit downticks in cap rates ranging from one to nine basis points.
