Cap Rates Compress in REALTORS® Commercial Markets During Q3.2015

Commercial real estate transactions span the price spectrum, but tend to be measured and reported based on size. While the majority of buildings (81 percent) are relatively small (SCRE), with the bulk of commercial space (71 percent) concentrated in larger buildings (LCRE), larger buildings account for the majority of sales. CRE deals at the higher end—$2.5 million and above—comprise a large share of investment sales, with transaction data readily available from several sources, including Real Capital Analytics (RCA).

Data for smaller transactions—$2.5 million and below—many of which are handled by REALTORS®, are less widely available. NAR’s Commercial Real Estate Market Trends gathers market information for SCRE properties and transactions.

Based on the latest NAR report on REALTORS® CRE markets, capitalization rates averaged 7.9 percent across all property types, a 26 basis point decline on a yearly basis. Apartments posted the lowest cap rate, at 6.7 percent, followed by retail properties with average cap rates at 7.7 percent. Office and industrial spaces posted identical cap rates of 7.8 percent. Hotel transactions reported the highest comparative cap rates—8.8 percent.

cap rates

Investors in SCRE markets have been attracted by the yield premiums. Capitalization rates for transactions in LCRE markets averaged 6.9 percent in the third quarter, based on RCA reports. Transactions of office properties in CBD markets recorded the lowest cap rates, at 5.3 percent, followed by apartment, at 5.8 percent. Retail and industrial properties also posted sub-7.0 percent cap rates, while hotel transactions averaged cap rates of 8.2 percent in the third quarter.

real capital

The interest rate on 10-year Treasury Notes—a standard measure of risk-free investments—averaged 2.2 percent during the third quarter of 2015, higher than the second quarter. Based on the prevailing rates, the spread between cap rates and 10-year Treasury Notes ranged from 470 basis points in LCRE market to 573 basis points in SCRE markets. The spread denotes that CRE investors are continue to enjoy healthy returns in the rebounding markets.

To access the latest Commercial Real Estate Market Trends report, visit:


George Ratiu, Director, Quantitative and Commercial Research

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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