CRE Cap Rates Mostly Stable
A healthy balance of moderate growth, low inflation and falling long-term interest rates kept commercial real estate capitalization rates broadly stable in first-half 2019, said CBRE, Los Angeles.
The CBRE North America Cap Rate Survey found multifamily and industrial cap rates tightened the most in the first half while office, retail and hotel cap rate movements were more modest. CBRE forecasts continued cap rate stability for most CRE sectors in the third and fourth quarters, though the hotel sector received a mixed sentiment.
“While the fortunes of the global economy should be watched closely due to increased tensions over trade with China, Persian Gulf hostilities and the prospect of a hard Brexit, there seems to be sufficient economic momentum and monetary policy flexibility in the U.S. to sustain real estate prices,” said CBRE Global Chief Economist Richard Barkham.
Though economic concerns are “heightened” at the moment, Barkham said he sees no evidence of investors hitting the pause button. “Indeed, the appetite for real estate from debt and equity capital remains very strong,” he said.
Among the major property types, industrial and multifamily cap rates tightened slightly while office, retail and hotel cap rates were generally stable, the report said. CBRE Global President of Capital Markets Chris Ludeman predicted office cap rates will likely remain stable for both central business district and suburban properties through the end of 2019, “supported by strong tenant demand for space, favorable investment sentiment and expectations for stable or decreasing interest rates.”
Industrial property cap rates and returns on cost remained at historically low levels in the first half. CBRE noted the average rate for acquisitions of stabilized industrial assets for all tiers and classes fell five basis points to 6.27 percent.
CBRE Retail Capital Markets Leader Melina Cordero noted cap rates for stabilized grocery-anchored neighborhood and community shopping centers remained stable at 7.48 percent in the first half, “confirming firm pricing trends and strong investor interest,” she said. But big-box and other retailer closures continue to influence the perceived risk profile for power centers, leading average cap rates for those assets to increase six basis points to 8.45 percent.
Multifamily cap rates remained at historically low levels in early 2019, CBRE reported. Cap rates for urban infill stabilized assets averaged 5.20 percent and expected returns on cost for infill value-add acquisitions averaged 5.95 percent. Suburban stabilized assets priced at 5.49 percent on average while expected returns on costs averaged 6.23 percent.
“Multifamily cap rates are at historically low levels, confirming positive pricing trends and sustained investor interest in the sector and a willingness to acquire assets at low cap rates,” said CBRE Multifamily Capital Markets President Brian McAuliffe. “Cap rate spreads between Class A and Class B and between Tier I and Tier II markets remained tight, indicating that many investors are finding better opportunities in lower-quality assets and in secondary and tertiary markets.”
In the hotel sector, late-cycle operating fundamentals are placing downward pressure on investment activity, which fell nearly 50 percent from 2018, said Kevin Mallory, Global Head of CBRE Hotels. “However, cap rate volatility between markets should not be viewed as indicative as it is being driven by changes in sales composition rather than actual movements in capitalization rates,” he said.
