CBRE: High Investor Demand, Moderate Economic Growth Should Maintain CRE Pricing

Strong demand from both domestic and foreign investors and moderate economic growth should keep commercial real estate capitalization rates broadly stable, said CBRE, Los Angeles.

The CBRE North America Cap Rate Survey found that industrial, multifamily and suburban office cap rates tightened the most in second-half 2019, while hotel and retail cap rates generally held steady except for a negligible increase for retail power centers. The report predicted continued cap rate stability during first-half 2020 across property types, segments, classes and market tiers except for a slight increase in the hotel sector.

CBRE arranged a construction loan to develop Hillcrest 111, a seven-story San Diego mixed-use property.

“U.S. real estate assets remain in high demand from domestic and foreign investors,” said CBRE Global Chief Economist Richard Barkham. “Cap rates were stable in 2019 and we expect them to remain so in 2020, despite the uncertainty created by the coronavirus and the upcoming presidential election.”

Barkham said continued moderate economic growth should keep interest rates low and sustain demand for commercial real estate.

Among the major commercial real estate sectors:

–Office: Strong market fundamentals continue to support competitive pricing for office properties, CBRE reported. There were “minimal” changes in office cap rates in second-half 2019, continuing a pattern of stability over the past three years and remaining near record-lows for this cycle. The firm said it expects no change in office cap rates in first-half 2020.

“Ten years of virtually uninterrupted demand and stable employment growth continue to underpin a favorable and competitive environment for U.S. office properties,” said Chris Ludeman, Global President of Capital Markets with CBRE. “Cap rates remain near record lows, supported by cyclically high levels of global and domestic investment capital seeking office assets.”

–Industrial: “Soaring” asset values led to sustained cap rate compression in late 2019, CBRE said. The report predicted cap rates will remain broadly stable this year with some moderate tightening.

–Retail: Cap rates held relatively stable in late 2019, especially across Tier I and II markets and Class A and B properties, with few sales of core assets, the report noted. Tier III markets and Class C assets attracted increased investment activity among private buyers due to higher risk tolerance and opportunities for redevelopment.

CBRE Retail Capital Markets Leader Melina Cordero said grocery-anchored neighborhood centers remain investors’ favorite retail asset class due to the centers’ perceived recession-resistance and relatively low e-commerce penetration.

–Multifamily cap rates and expected returns on cost remained at historically low levels in second-half 2019, said CBRE Multifamily Capital Markets Leader Brian McAuliffe. Cap rates edged down 9 basis points to 5.11 percent for infill stabilized assets and by 11 basis points to 5.37 percent for suburban assets. Cap rate spreads between Class A and Class C assets and between Tier I and Tier III markets tightened, indicating many investors are finding opportunities in lower-quality assets and in secondary and tertiary markets.

“Continued healthy market fundamentals–particularly low vacancies and steady rent growth–contributed to multifamily’s appeal and sustained high levels of investment at low cap rates,” McAuliffe said. He noted low interest rates contributed to investors’ “favorable view” of the sector and influenced pricing decisions. “There is more optimism for continued solid pricing in first-half 2020,” he said.