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Where Are Cap Rates Going in the Four Core Property Sectors?

Experts predict little change in either direction in the first half of the year.

With late 2018 jitters gone and investor optimism returning, the commercial real estate market should experience mostly steady cap rates through the first half of 2019, although there are particular market segments and geographies that could experience some bumps.

“On the interest rate side, I think everybody has dismissed, at least for the time being, the inflation threat so that kind of stress on pushing cap rates higher isn’t there right now,” says Manus Clancy, senior managing director of applied data, research and pricing with Trepp. “We went through a tough period in December when people were jittery. Now everybody has taken a deep breath; they don’t feel like the wheels are falling off either the U.S. or the global economy.”

Still some changes, although potentially muted, could be in store. Recent trends suggest there is little room left for cap rate compression, according to Matthew Schreck, quantitative strategist with online real estate marketplace Ten-X. “We expect increases to both interest rates and spreads to drive some loosening in cap rates in 2019 across all property types,” he says.

Abundant capital availability, economic growth and a favorable supply-demand environment led to broadly stable cap rates for U.S. commercial real estate properties during the second half of 2018, according to the North America Cap Rate Survey from CBRE Research.

CBRE professionals included in the survey forecast cap rate stability during the first half of this year, although sentiment varies by sector, with the most mixed opinions coming in the retail and multifamily sectors.

Here’s a look at what real estate experts predict for four core commercial property types:


“Industrial cap rates in gateway markets are tightening rapidly, while flattening out in secondary/tertiary markets,” notes Schreck. “Industrial cap rates are also extremely tight in the Northeast and West regions, in the mid-5 percent range.”

The two trends are related, according to Schreck, as real estate investors place a premium on warehouses and distribution centers located in the major coastal population centers with the greatest access to consumers.

Every class of industrial property saw falling cap rates in the second half of 2018, according to CBRE data, with gateway coastal markets generating the lowest cap rates.

“In industrial, it’s a solid environment right now,” Clancy says. “The perception is that demand will continue to outpace supply as companies like Amazon and other e-commerce firms just keep eating up space.” He predicts cap rates will remain steady or decline slightly during the first half 2019.

Barbara Byrne Denham, a senior economist at research firm Reis Inc., also cites investor demand for industrial product.

“This steady cap rate decline, like the one for the apartment market, defies the conventional wisdom that cap rates increase with interest rates,” says Denham. “It is, however, indicative of the general investor interest in industrial properties, given the fundamentals we saw in this asset class in recent quarters.”


Although cap rates on office properties in Central Business Districts (CBDs) are about 150 basis points lower than those on suburban offices at a national level, according to data from research firm Real Capital Analytics (RCA), that doesn’t mean investors are flocking to the suburbs for higher yields, Schreck says.

“Despite greater yield potential for suburban assets at this point in the cycle, investors are deterred by weaker job growth and leasing prospects in suburban areas, as well as the glut of suburban office vacancy overhang,” he said.

There been far more volatility in office cap rates than in apartment cap rates, according to Denham, although there’s been little overall change when looking at a five-year window. In the fourth quarter of 2013, the mean cap rate on office product was 7.4 percent, while in the fourth quarter of 2018, it was 7.2 percent. This lack of compression stands in sharp contrast to apartment cap rates, which have steadily declined since 2013, she said.

In the CBRE survey, about 70 percent of professionals said they expect no change in CBD and suburban cap rates in the first half of the year. Most others expected modest increases of 25 basis points or less.


The average cap rate in the multifamily sector remained flat at 5.4 percent in the fourth quarter, after falling in previous quarters, according to Denham’s analysis.

When looking at the top 50 metros overall, the mean price per unit leveled off in the fourth quarter, despite rising in previous quarters, she says. That doesn’t necessarily mean the market has plateaued or that cap rates will rise, however. For now, this is a one-quarter trend and the average price per unit is subject to selection bias, Denham notes. New York City and Los Angeles, for example, saw their average price per unit decline in the fourth quarter as cap rates rose.

Schreck expects real estate investors to continue to search out secondary and even tertiary markets for multifamily acquisitions, where the outlook for net operating income (NOI) growth is a bit brighter.

“Primary market apartment cap rates have drifted up in the past year, whereas secondary/tertiary apartment caps are still tightening,” he says. “Apartment demand will continue to be strong and broad-based across regions and market types, but primary markets are seeing larger development pipelines influencing fundamentals.”

The luxury side of the market is a concern, according to Clancy. “At the high end, people are concerned about oversupply and lack of demand. Wherever you see overbuilding in 24-hour cities, it wouldn’t be that big of a surprise if cap rates went up as demand tapered off,” he said.

Student housing could experience a similar trend, Clancy notes.

“Cap rates have room to move up in student housing, especially in college towns that have added a lot of inventory. An increase of 50 to 100 basis points wouldn’t be out of the question as people start to realize how many new beds have been added.”


Real estate services firm Cushman & Wakefield, in a recent market commentary, noted that retail cap rates continued to rise in the fourth quarter, but the increase was more muted in the major metros. “Cap rate increases were driven by class-B and -C segments, while class-A yields seem to have stabilized,” the commentary read.

The retail market remains bifurcated, with great properties such as destination malls at one end and older properties with lesser-name retailers and occupancy challenges at the other, each with its own cap rate band, Clancy says.

He forecasts that cap rates at both ends of the spectrum should stay steady through the first half of the year, unless something unexpected happens, such as a surprise bankruptcy filing or store closings that no one anticipates.

“It’s not like people don’t know about the carnage that’s gone on,” Clancy notes. “In fact, these first three months of 2019 have been quite painful for the market—another rash of bankruptcies and store closings.”

But store closings have been impacting the retail market for a while. “Given all of the store closures in 2017 and 2018, it is surprising that retail cap rates held up as well as they did last year,” says Denham. “However, retail cap rates did climb significantly in 2018, rising above the 10-year average of 7.9 percent.”

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