Where Do You Go in a Low Cap Rate Environment

CBRE welcomed an esteemed panel to discuss cap rates and CRE investing in a recent podcast.

Among them was Rod Vogel, Senior Managing Director and Head, Private Equity, Production, Principal Real Estate Investors, who has his finger on the pulse of 40 US markets. 

“When you’re in 40 different markets, you’ve got a good lens on what’s going on in the US commercial real estate marketplace specifically. Our clients love multifamily and they love industrial, for obvious reasons, the space market fundamentals are tremendous.” 

That said, “almost everyone universally loves the two property types,” Vogel said. “That’s the positive. The challenge, however, is yields, and those two property types are at the lowest I’ve ever seen in my 33 years with cap rates (both in the 3s).”

He said this reminds him of a song from the 90s’ band, No Mercy, ‘Where Do You Go.’ “And where we’ve chosen to go with our clients is into development of industrial and multifamily,” Vogel said.

Vogel said what this climate has also done is force Principal Real Estate Investors to broaden its array of property types that it is investing in and moving into some what it calls niche property sectors, single-family rental, manufactured housing, data centers and life sciences, to name a few, he said. 

“And those are four that we’re actively investing in today,” Vogel said. “We’re looking to underweight retail and office. We’re selling there where we can and again, primarily focusing on the niche property types and industrial multifamily for our growth going forward.

“Markets like Boston, San Francisco, Seattle, Raleigh, (these) life science markets have a lot of room to run and we think will offer some real compelling long-term investment returns.” 

Co-panelist, Paige Morgan Executive Vice President, CBRE, based in Portland, said she is seeing more of the private buyers come to play “and they’re more yield-driven, so they’re willing to accept more of that risk in exchange for a higher yield where we really haven’t seen the institutional capital move into that space.”

Need to See Where the Puck is Going

Morgan said, “At first blush, it’s sort of surprising that the office sector was sort of flat. But I think when you really dig down, what was probably leading to a lot of that is that the kind of liquidity we did see was more in that long-term net leased assets for the office space.”

Morgan said one of the real valuable lessons for brokers lately – and what her clients are constantly enforcing to her – is that “we need you guys to see where the puck is going, not where it’s been. We really need to look forward to see the trends and see where things are heading; if we’re looking in the rearview mirror, we’re missing value in perspective.”

The cap rate report is important, “but I want to reflect on the fact that cap rates are just one measure of return,” she said. “When you’re looking at these low rates in industrial and multifamily, people are getting kind of fixated on these low cap rates. 

“But given the rent growth that we’re seeing in some of those markets—particularly industrial, just driven by this unprecedented level of demand—that isn’t always captured in the cap rate. So that all-in return is probably on par—and even maybe a little bit tighter—with where the principal was pre pandemic.”