A wall of domestic and global capital, above-trend economic growth, and a continued low interest rate environment led to broadly stable capitalization rates for U.S. commercial real estate assets in the first half of 2018, according to the latest research from global property advisor CBRE.
The CBRE North America Cap Rate Survey showed rates remained broadly unchanged across the sectors in H1 2018, except for some retail segments.
Industrial cap rates tightened the most and multifamily rates edged down modestly. Office cap rates were generally stable, while the hotel sector also held firm. Continued cap rate stability is expected in H2 2018.
“Cap rates have been held down by above trend economic growth and continued low interest rates. Investors are keen to buy into the innovation that is taking place in real estate, particularly logistics and office markets. The wall of capital targeting real estate is bigger than it has ever been, and there is some degree of difficulty in finding investments. Existing owners want to hold, and even if they are leveraged up, have the refinancing options to be able to do that. It is very competitive,” said Richard Barkham, Global Chief Economist, CBRE.
“We expect cap rates to remain stable in the second half of 2018. The U.S. economy is performing very well with very modest upward pressure on inflation. These are great conditions for real estate,” Dr. Barkham added.
Industrial and logistics cap rates fell by 10 bps on average to 6.42 percent in H1 2018 and experts predicts they will continue to decrease in what is a blisteringly hot sector.
Office cap rates decreased slightly for CBD properties and increased slightly for suburban properties in H1 2018. “There is plenty of capital that wants office product – whether core or value-add. But, there are too few quality assets on the market to satisfy capital demand,” said Chris Ludeman, Global President, Capital Markets, CBRE.
Retail cap rates increased across the board as investor sentiment about the sector improved due to strong consumer spending and tax reform.
Multifamily cap rates maintained stable and historically very low levels in H1 2018, confirming that real estate investors remain very interested in the sector and confident in its performance.
Hotel cap rates were down slightly by 4 bps in H1 2018, reversing a more than two-year trend of modest increases. Most market segment had single-digit downticks in cap rates.