cap rates

Cap Rates Compress in REALTORS® CRE Markets In Q2.2016

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 (small cap CRE), with the bulk of commercial space (71 percent) concentrated in larger buildings (large cap CRE), 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 small cap CRE properties and transactions.

In light of the global low-rate environment, investors have been searching for higher returns. U.S. commercial real estate continues to offer stronger yields, especially in rising smaller markets. Based on the latest NAR report on REALTORS® CRE markets, capitalization rates averaged 7.0 percent across all property types, a 50 basis point decline on a yearly basis. Apartments posted the lowest cap rate, at 6.5 percent, with Class A apartment transactions recording average cap rates of 6.2 percent. Office transactions witnessed average cap rates of 6.8 percent, with Class A properties posting yields of 6.5 percent. Hotel transactions registered caps of 7.0 percent, followed by retail properties, with cap rates averaging 7.1 percent. Industrial spaces posted average cap rates of 7.4 percent, with Class A properties commanding yields of 6.9 percent.

cap rates

Capitalization rates for transactions in large cap CRE markets averaged 6.6 percent in the second quarter, a 30 basis point compression, based on RCA reports. Transactions of office properties in CBD markets tied with apartments for the lowest average cap rates, at 5.6 percent. Retail properties recorded cap rates of 6.4 percent, followed by industrial properties, at 6.8 percent. Hotel transactions averaged cap rates of 8.5 percent in the second quarter.

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The interest rate on 10-year Treasury Notes—a standard measure of risk-free investments—averaged 1.6 percent during the second quarter of 2016, 80 basis points lower than the second quarter of 2015. Based on the prevailing rates, the spread between cap rates and 10-year Treasury Notes ranged from 500 basis points in large cap CRE markets to 540 basis points in small cap CRE markets. The spread denotes the continued attractiveness of commercial assets for both domestic and global CRE investors.

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To access the latest Commercial Real Estate Market Trends report, visit: http://www.realtor.org/research-and-statistics/commercial-real-estate-market-survey.

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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