LOS ANGELES—The general direction for cap rates this year will be up, CBRE says in its latest North America Cap Rate Survey. “The recent spike in inflation and anticipated higher interest rates this year will add upward pressure on cap rates, offsetting the downward forces of expected strong institutional and global capital flows,” says Spencer Levy, senior economic advisor and head of Americas research at CBRE.
This outlook follows a six-month period in which cap rates fell slightly overall, although they increased in the retail sector in last year’s second half, mainly on account of power centers. ”US cap rates were largely flat outside of the retail sector in H2 2017 though a shift from sale to refinance activity contributed to lower transaction volumes,” Levy says.
In the case of office, the second half of 2017 saw a modest reversal of the upward trend for CBD properties and a slowdown in the rise of cap rates among stabilized suburban assets. CBRE’s expecting cap rates in office to hold steady over the course of 2018.
In the office sector, “the flat cap rate environment is most indicative of two shifts: a material decrease in foreign capital in 2017 that was often the high bidder, particularly for gateway core office; and the shift towards the highly liquid refinancing markets for many would-be sellers,” says Chris Ludeman, global president, capital markets. “Overall, we expect flat to rising cap rates in gateway markets in 2018 due to both late cycle and rising interest rate factors, though fast-job-growth smaller markets may see further modest declines as investors search for yield and the depth of the institutional buyer pool in these markets increases.”
The biggest declines in cap rates during H2 were for industrial and logistics assets, which tightened by 13 basis points to 6.52%. “The industrial and logistics sector has performed exceptionally well, though the best product—big box warehouse distribution in major markets with large credit tenants—is now unlikely to see further cap rate compression,” says Jack Fraker, global head of industrial & logistics. There’s also increased institutional attention to “smaller ‘last mile’ sites that benefit from both e-commerce and the growth of new local industries,” he adds.
While the industrial sector saw the greatest compression in cap rates, multifamily continued to post the lowest rates of any major property sector—historically low, in fact at 5.23% for infill properties and 5.59% for suburban. “Multifamily is showing continued strength with a significant capital shift underway towards secondary and suburban markets,” says Brian McAuliffe, president, institutional properties, capital markets. Accordingly, he says, “cap rate compression could occur even in the face of any modest continued upward interest rate movement.”
Hotel cap rates held largely steady in H2, with slight upward or downward movement ranging from minus three bps to plus six bps across chain scales and geographic regions. Observes Kevin Mallory, global head and senior managing director, CBRE Hotels, “The hotel sector continues to benefit from investors seeking yield premiums over other asset classes, despite slowing growth rates in underlying fundamentals. We are sensing renewed optimism around pricing power for operators in 2018. Interest from all equity types continues to be strong, enhanced by a perceived strengthening in fundamentals driven by optimism from the tax overhaul.”