March 21, 2009
CalculatedRisk points us to a brief article put out by CoStar a few days ago has some interesting numbers on Cap Rates and the continued rise across office, industrial, and multi-family sectors. The data is generally as follows:
- Class A Office data indicates that average cap rates for Q1 2009 will come in around 7.9% nationally, 30 basis points higher than Q4 2008 but much higher than the 6.1% recorded in Q4 2007.
- Class A/B Industrial data indicates that average cap rates for Q1 2009 will come in around 8.6%, 50 basis points higher than Q4 2008 but much higher than the 7.1% recorded in Q4 2007.
- Class A Multi-Family data indicates that average cap rates for Q1 2009 will come in around 6.8%, about the same as Q4 2008 but almost 100bp higher than the 5.9% recorded in Q4 2007.
The data released in the first quarter’s Korpacz report, a survey by PriceWaterHouseCoopers, indicates that according to more than 100 institutional and private investors, the prediction is that:
…cap rates will rise by an average of nearly 50 basis points over the next six months across virtually all property categories and most metro markets.
Some of the weakest sectors are power centers, where respondents expected cap rates to rise by 74.4 basis points, and suburban office and regional malls, both anticipating decliens of about 65 basis points. One of the markets expected to weaken the most over the next six months is Washington D.C., where respondents expected a 118 basis point decline in cap rates.
The last point makes a lot of sense. As equities and debt began to weaken over the past year or so, many felt commercial real estate would be hit not nearly as bad, particularly here in Silicon Valley. The reality is that commercial real estate is just another asset class; it is hard to buy into a 6% cap property when debt, equities, and other investments are trading at such low prices. The opportunity cost just becomes so great that either one will have to rebound, or the other (commercial real estate) will have to fall in line. Granted the decline may not be as bad, but given the fact that there is too much uncertainty in the market for equities and debt to readjust anywhere near previous levels in the short to even medium term, commercial prices will continue to deteriorate as cap rates and vacancy levels increase, and rents decline.
- Prudential First Quarter CRE Report
- Real Estate Roundtable Q4 Sentiment Index: Better But Not Good
- CMBS Delinquency Rate Continues To Rise; Inland Western Issues $500M CMBS Deal
- California and Silicon Valley Unemployment Rate Numbers
- NAR August 2009 Commercial Real Estate Outlook