Where Are Cap Rates Headed Next?

NEW YORK CITY—The question on everyone’s mind, says Integra Realty Resources, “is whether capitalization rates can go any lower.” The firm’s mid-year report charts further cap rate compression as 2015 has progressed, along with an acceleration of that compression in most of the major property types. Only in flex industrial product has cap rate compression eased measurably.

“Capitalization rates on class A multifamily and office deals in Tier 1 cities are in the mid-4% range at today’s borrowing rates and are driving cash-on-cash equity returns of sub-3%,” according to IRR’s report. “Either the market believes that there is a future with runaway inflation/appreciation which will drive a higher overall yield on exit, or there is just too much money chasing too few deals. If it’s the latter, and the market cannot support real appreciation through sustainable rent growth, then a yield reset will occur following monetary policy changes, which are expected by most market analysts in the coming six to nine months.”