CBRE's H2 2024 Cap Rate Survey paints a picture of a commercial real estate market that is gradually finding its footing after a period of significant disruption. While challenges persist, particularly in the office sector, the overall trend is towards stabilization and the improved investor sentiment.
After a tumultuous period marked by a 51% decline in annual sales volume in 2023, the market has begun to rebound, with a 9% increase in 2024.
The survey, conducted between November and December 2024, captures 3,600 cap rate estimates, providing a snapshot of investor sentiment and market conditions. Despite the volatile nature of Treasury yields throughout 2024, cap rates have mainly remained steady during the second half of the year. This stability comes as a relief to many in the industry, signaling an end to the repricing phase for most sectors.
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However, the market response has not been uniform across all property types. Industrial and multifamily sectors have seen a decrease in cap rates, driven by improved prospects for NOI growth. In contrast, the office sector continues to face challenges, with financial distress putting upward pressure on cap rates.
A key finding from the survey is the shift in investor expectations regarding future cap rate movements. Compared to previous surveys, fewer respondents anticipate further yield increases across all property categories. The most common response in this latest survey was "No Change," indicating a growing belief that cap rates may have peaked.
The office sector, however, remains an area of concern. While the outlook has improved compared to a year ago, it still has the highest share of respondents expecting further devaluations.
A notable recovery is taking place in CBDs of gateway cities, particularly in prime properties. However, suburban submarkets face more uncertainty due to weaker fundamentals and fewer prime spaces.
The office market continues to show a clear bifurcation in performance. Class A offices have seen yields widen to exceed 8%, while less competitive Class C spaces are experiencing distressed pricing with cap rate estimates averaging in the low teens. This disparity highlights the ongoing challenges faced by the office sector as it adapts to changing work patterns and tenant preferences.
The survey also reveals an increase in the average spread between respondents' lower and upper cap rate estimates for the office sector. This widening spread suggests greater uncertainty in office property pricing, particularly within the Class B and C segments.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
