Industrial Saw Most Cap Rate Compression In H2 2021

The industrial sector saw the most cap rate compression in the second half of 2021, driven by skyrocketing e-commerce sales, helping the real estate capital markets end the year on a high note. 

“Cap rates declined across the real estate spectrum,” CBRE analysts write in a new report analyzing the firm’s most recent Cap Rate Survey, which was conducted before the Russian invasion of Ukraine. “The industrial sector’s super-charged rent growth amid the pandemic meant this segment accounted for the greatest decline in yields during the past year, regardless of class (e.g., A, B) or risk profile (e.g., Stabilized, Value-Add).”

The firm noted “little concern about the burgeoning development pipeline” among respondents, with 94% saying they believe heavy development will not hamper NOI growth and investment capital and pointing to very low cap rate levels in Riverside, Phoenix and Dallas, as well as supply-constrained port markets like Los Angeles, Oakland, and Northern New Jersey.

CBRE notes that the growth in CRE investment sales is highly concentrated: multifamily saw the biggest uptick and accounted for nearly half of all sales, while office and retail saw comparatively muted activity.

Multifamily cap rate compression is following a “clear geographic pattern,” with high-growth Sun Belt markets showing the greatest declines. More than 80% of those surveyed by CBRE say pricing in high-growth secondary markets is converging with gateway cities.

Meanwhile, respondents CBRE surveyed were split on whether office cap rates across all markets will increase or decrease this year, but noted that they expect cap rates to increase during the next six months for gateway CBD markets, meaning suburban submarkets could benefit.

But CBRE anticipates investors will continue to look to CRE for attractive returns relative to other options, as well as an inflation hedge.  The firm predicts investment volumes to tick up 10% this year, and say they expect the yield on 10-year Treasuries to increase to 2.3%, a level that will maintain a healthy spread relative to real estate cap rates.

“Property market fundamentals, which are driving returns, will be underpinned by strong economic growth. Thus, we anticipate that investors will continue to look to real estate for both relatively attractive returns and an inflation hedge,” the firm writes in a report analyzing the H2 2021 cap rate data.

The Cap Rate Survey captures 3,600 cap rate estimates from across more than 50 geographic markets.