Cap rates should remain relatively low for the remainder of 2013, despite rising interest rates seen over the past two months, according to Brookfield Financial.
The New York based global investment banking and commercial property brokerage firm just released the results of its 10-Year Trend Analysis of the Manhattan office sales market.
“Everyone is concerned about what rising interest rates will mean for cap rates, but our analysis reveals an implied resiliency in the Manhattan office market,” said Eric Anton, managing partner of Brookfield Financial. “For the remainder of 2013, at least, if the interest rate climb is slow and incremental, we project cap rates to remain stable.” The average spread between 10-Year Treasury Bond and Manhattan office cap rates is 220 basis points, and Manhattan office cap rates remain well below the long-term average of 6 percent, according to the Brookfield Financial report. The current spread is 3.8 percent despite steady interest rate increases over the past two months.
“Manhattan cap rates will continue to demonstrate this resiliency despite the recent increases in the 10-Year Treasury Bond rates,” said Anton. “However, cap rates will rise if the yields on the 10-Year Treasury Bonds increase at the pace observed over the past several months.”
The continued low cap rates for Manhattan office properties is mostly due to improving market conditions, according to Anton, as strong buyer interest aided by historically low financing costs continues to drive up prices of properties and in turn depresses expected returns. Over the next six months, investors surveyed by Brookfield Financial expect the cap rate will hold steady despite the rise in interest rates.
Investors tend to favor “gateway” cities, including New York, Washington D.C. and San Francisco, according to the Brookfield Financial report, and are willing to pay skinny cap rates to gain exposure to these markets. This strong demand has kept cap rates low. Over the first half of 2013, Manhattan’s office cap rate of 5.3% was slightly below Washington D.C. and San Francisco, which both had cap rates of 5.4%.
