CBRE: Cap Rates Stable for Most Property Types

Despite an investment activity slowdown, commercial real estate cap rates remained stable across most asset types during first-half 2016, reported CBRE Group, Los Angeles. 

Multifamily and industrial properties held their pricing as cap rates widened slightly in other sectors, CBRE said.

“Given investor caution after long periods of sustained price appreciation, we had expected to see more increases in cap rates; however, the decline in government bond yields has kept the spread of cap rates above the risk-free rate favorable, which has helped to support current price levels,” said CBRE Americas Head of Research Spencer Levy. 

Levy said real estate fundamentals remain strong “and its returns are favorable relative to other options.”

CBRE predicted minimal or no change across property types over the remainder of the year for more than 60 percent of markets. “In those markets where change is anticipated, cap rates are more likely to increase rather than decrease, but any changes will be small, CBRE’s North America Cap Rate Survey said.

Multifamily housing fundamentals remain healthy, CBRE said: “Both cyclical and structural trends continue to create strong market demand. Although modest, multifamily properties reported widespread cap rate decreases among the different categories and have the lowest overall cap rates of any major property type.” 

But the report noted that cap rates edged downward for tertiary markets, indicating that investors are still willing to accept higher risk in both quality and location for higher returns.

CBRE Capital Markets Senior Managing Director Chris Akins noted that foreign capital is becoming more comfortable with U.S. multifamily investment, which helps keep cap rates low. “We have not seen significant over-supply, although we are starting to see moderated rent growth as a result of new supply in some markets,” he said. 

Industrial cap rates remained essentially unchanged, signaling the strength in this property sector, CBRE said.

Office-sector cap rates have edged upward “modestly” in 2016–moreso for suburban properties than central business district offices, CBRE reported. “Cap rates for properties located in markets whose economies are heavily dependent on the energy sector had a greater tendency to rise,” the report said. 

Retail cap rates also rose modestly, most notably among Class B neighborhood/community centers. This indicates growing investor concern about non-prime assets, particularly those vulnerable to rising competition among grocers in already-crowded markets. 

The upward shift of hotel cap rates that began in early 2015 continued through the first half of 2016, with rates rising across most hotel categories, CBRE said.