Cap Rates May Have Hit Their High Point

If the more than 250 CBRE respondents to a survey are correct, bond yields may have previously reached their peak, which should be taking pressure off cap rates in general.

First, two caveats. The first comes directly from CBRE. “Given the current rapidly changing investment landscape, estimates may not reflect recent events or the most current market conditions. Readers should view all cap rate estimates within this context.”

The second is that all the respondents work for CBRE, and so views and estimates may include various types of biases, including institutional ones. That said, business data is never perfect.

One part of the data — Treasury bond yields — isn’t in question. The 10-year almost crossed the 5% threshold in October 2023. But they retreated after. There has been up and down shifts, with 2023 closing out at 3.88%, climbing again to 4.30% on February 16, 2024, and down again to 4.09% at the close of Thursday, March 7, 2024.

“This rise in bond yields was a headwind to deal flow and caused cap rate expansion to accelerate relative to H1 2023,” the report said. “The average cap rate increased from 6.4% to 7% in H2 2023, with expansion across multiple property types.” But signals form capital markets and CBRE’s cap rate survey suggested that the higher rates wouldn’t last — so far, they are well down from the peaks — but that office might face “further upward pressure.”

Stabilized estimates from the survey suggested that through the end of 2023, there was significant cap rate expansion. The average cap rate rose from 6.4% to 7% across multiple property types.

The greatest level of expansion was for office, with a greater than 100 basis point increase for Class C urban properties. Suburban expansion was generally less than 50 basis points. Multifamily in some key cities were up 50 basis points or more. In weaking market conditions — Charlotte and Orlando the proffered examples — multifamily cap rates rose fastest. Neighborhood retail cap rates were the most stable.

Most respondents thought that cap rates had reached a peak, with fewer respondents expecting increases in the first half of 2024 than had expected so for the same period in 2023. “This likely reflects investor expectations of a more accommodative Federal Reserve policy and bond yields decline from October 2023 highs.”

It is prudent to remember that investors often respond in greater degrees than seems realistic. Fed Chair Jerome Powell’s recent testimony before Congress indicated that interest rates are unlikely to go higher, but rate cuts don’t seem to be just around the corner.