Rent Growth Drives Cap Rates Down

Richard Green

Rent growth is good news for investors and developers, but extreme rent growth causes compressed cap rates and drives up prices—and it limits opportunities for investment. This is a trend that has grown in Los Angeles, where rent growth is expected to be in triple digits through 2019. Investors have been paying all-time low cap rates in Los Angeles that range anywhere from sub 4% to a .7% cap rate for a recent multifamily trade in Venice.

“Rent growth should be driving down cap rates,” Richard Green, USC Lusk Center Director, tells GlobeSt.com. “It creates an opportunity for growth that produces lower cap rates and higher valuations. The fundamentals explain the low cap rate environment, but the scary thing is that cap rates can change. If a cap rate moves from 4% to 5%, that is a 20% difference in value immediately. The thing that is a little nerve racking is that you need a small change in cap rates to get a big change in value.”