CBRE: Cap Rates Remain Stable

Michael Tucker mtucker@mba.org

February 28, 2019


Strong economic growth, abundant capital and a favorable supply and demand environment led to broadly stable capitalization rates for U.S. commercial real estate assets in second-half 2018, said CBRE, Los Angeles.

Cap rates remained generally unchanged across property sectors in H2 2018, the CBRE North America Cap Rate Survey reported. Industrial cap rates tightened marginally across all segments, while office, multifamily and hotel cap rates remained generally stable.

CBRE said it expects continued cap rate stability throughout the first half of 2019, with the multifamily and retail sectors experiencing the most mixed sentiment. "Investment activity remains robust, driven by a strong economy, significant amounts of capital and a sense that supply and demand in real estate markets is very well balanced," said CBRE Global Chief Economist Richard Barkham.

Office cap rates increased by a greater amount for downtown properties than for suburban assets in late 2018, CBRE Capital Markets Global President Chris Ludeman said. Suburban office cap rates remained relatively flat across all classes and investment strategies.

"Liquidity remains ample and will continue to fuel office acquisitions in 2019," Ludeman said. "For assets deemed to be reasonably priced, bidding pools are wide and deep. Continued strength of property fundamentals, balanced occupier demand and supply, robust capital flows and accommodative pricing of debt and equity all combined to ward off material expansion in yields."

Industrial and logistics cap rates declined by 7 basis points to 6.34 percent for stabilized asset acquisitions in second-half 2018. Cap rates for stabilized properties of all classes fell, with Class A industrial properties declining 7 basis points to 5.07 percent, Class B falling 13 basis points to 5.98 percent and Class C down 2 basis points to 8.02 percent. Expected returns on cost for value-add assets decreased 2 basis points overall to 7.45 percent, the report said.

Multifamily cap rates remained historically low in H2 2018, said CBRE Capital Markets President Brian McAuliffe. "Multifamily cap rates were largely stable in the second half of 2018 and overall market sentiment continues to be positive," he said. "Headwinds that were expected to moderate sales last year such as rising interest rates and additional supply in some markets had little impact."

McAuliffe noted the multifamily sector offers an attractive pricing environment and predictable cash flow. "Investors continue to move out the risk curve to find new opportunities and greater yields," he said.

Hotel cap rates remained mostly stable in late 2018, CBRE said. Most market segments and geographic areas had modest single-digit upticks or downticks in cap rates ranging from minus 2 to plus 9 basis points.

"Hotel sector fundamentals have offered few, if any, surprises," CBRE Hotels Global Head and Senior Managing Director Kevin Mallory said. "This combined with continued high liquidity in the debt markets has allowed for relative stability in cap rates. While one might anticipate upward pressure because of late cycle fundamentals and some volatility in the capital markets, the weight of capital focused on the sector has kept cap rates in check."

Retail cap rates for both stabilized and value-add properties increased for all retail segments in H2 2018, the report said. Cap rates for both power and neighborhood/community center stabilized properties are expected to remain unchanged or increase slightly in the first half of 2019.

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