Cap Rates Expected to Stabilize in L.A. This Year

Cap rates are likely to stabilize this year in Los Angeles. According to a new report from CBRE, moderate economic growth and investor demand will stabilize for apartments, retail, hotels and office. Industrial cap rates, however, will continue to compress in the region. This trend follows a tightening of cap rates across asset classes in the second half of 2019.

“As we approach the 11th year of the market expansion—the longest ever—steady regional economic growth and investor interest in area real estate has supported stable cap rates hovering at or near all-time lows throughout 2019,” Eric Willett, regional director of research at CBRE, tells GlobeSt.com. “Investors remain attracted to the area’s talented labor pool, diversified economy, and global connections, and they have proven themselves willing to pay premium prices for safe assets in gateway markets like Los Angeles.”

Apartment cap rates are 4.8% for infill product and 5.4% for suburban product, and hotels are at 8.3%, according to the report, and office and retail both had minimal changes in 2019. Industrial, on the other hand, continued to compress last year and will likely continue to decrease this year. “Over the last decade, investor activity in the industrial sector has surged and prices have followed,” says Willett. “We have seen unprecedented investor demand for well-located logistics facilities in Los Angeles with proximity to the nation’s largest port facilities and the region’s large and affluent population. As the market for class-A product becomes ever more competitive, in 2019 demand for lower quality assets grew, and Los Angeles class-C industrial cap rates dropped 25 basis points in the second half of the year.”

While the economy is continuing to grow at a moderate pace, the vast pricing increases from this cycle have largely leveled off, resulting in stabilized cap rates. “The strong economy and investor demand has supported continued pricing growth in absolute terms and sustained cap rates for institutional assets at low levels,” says Willett. “In 2019, accommodative monetary policy also supported the low cap rate environment in the face of macroeconomic uncertainty such as the trade war with China and impeachment debates in Congress.”

The economy is also stable, driving this stability in pricing, and there are few significant concerns of a major economic event. “We expect steady economic growth in the region to continue in 2020 and anticipate that pricing will remain largely stable,” says Willett. “While it is possible that macroeconomic factors such as the presidential election or coronavirus fears could affect pricing—particularly if interest rates materially change—the strong economic fundamentals suggest continued pricing strength for real estate assets in our area.”