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.”

That being said, IRR predicts that cap rates will remain relatively stable in the second half of the year. When all is said and done, '15 will yield positive value appreciation across all property sectors nationally, especially for suburban multifamily, class A industrial and full service lodging, according to IRR.

Supply and demand dynamics now run a close second to property income growth as the most important factors to affect cap rates of institutional properties in the coming 12 months as more markets experience a rise in new construction. The other factors governing cap rate movement are local economic metrics and interest rates, although IRR's report notes that the firm “does not subscribe to punditry which would have us believe that the entire economy is driven by Fed policy.”

By property type, urban class A multifamily is seeing the lowest average cap rates at 5.44%, although the cap rates on individual assets in this sector may range from 4% to 8%. It's a slightly wider range than what suburban class A apartments are experiencing: 4% to 7%, the 300-basis point range for these properties being narrower than for any other asset class, although cap rates for suburban product have contracted more gradually than those of urban class A assets.

“Nationally, the multifamily sector has experienced strong expansionary conditions but the risk of sliding into hypersupply is greatest in the coming 12 to 24 months,” according to IRR's report. IRR counsels caution in the second half of the year, “as investors seek yields in an already frothy market. Forecasts signal stagnant or marginal cap rate compressions.”

Ninety-three percent of IRR's CBD office markets are experiencing “late-stage recovery or expansionary market conditions,” the report states. Cap rates have remained steady or contracted in almost every IRR office market nationally year-over-year, with the exceptions of Jacksonville and Tampa.

More than 30% of IRR's national markets predict going-in cap rate compression in suburban office and flex industrial properties over the next 12 months. In addition to demand-side rent growth, this will lift values in these property sectors, the firm says. Additionally, IRR says that 80% of its national markets call for stability in cap rates for regional malls.