Each week, Marcus & Millichap's chief intelligence and analytics officer, John Chang, advises commercial real estate participants to keep their eyes on the horizon when evaluating market trends. This week, however, Chang encouraged industry observers to use a shovel and a rake to dig below the surface for insights beyond cap rate averages.
Cap rates provide fodder for wide-ranging analysis and debate. Chang said he typically tracks these as a benchmark that can help investors stay in tune with the broader investment climate.
Looking specifically at the apartment market, the average cap rate in the United States is about 6%. Narrowed to primary markets, the median comes out to 5.7% and 6.6% for tertiary markets, he said. For Class A properties, it's 5.8% and 6.1% for both Class B and Class C's combined.
Recommended For You
The analysis can break down even further. The average cap rate for Class A properties in primary markets may be as low as 4.7%, while a Class C apartment in a small tertiary market may round out to around 7.2% or higher.
“These are still averages, blending markets and deals, but they offer more granular insights,” said Chang.
The movement of these measurements in different types of metros over the past few years provides interesting insights as well. In 2019, capital began flowing aggressively into secondary markets, which drove the apartment cap rates in those metros lower. Tertiary market cap rates followed in 2020 and measurements in primary markets began declining later in 2021, he said.
“My point here is that there are definitely nuances affecting different types of assets in different markets,” said Chang. “So even though the average cap rate for apartments is 6%, the cap rate range is somewhere between 4.7% and 7.2%.”
Other sectors demonstrate this as well. Office properties have an average of 7.9% with a range from 6.1% to 9%, while multi-tenant retail has a median of 7.4% with a range from 5.9% to 8.5%. The spread on industrial properties is even wider, running from 5% to 8.1% with an average of 6.9%, reflecting the wide variance in industrial property vintages, quality and market demand levels. The property type with the broadest cap rates is hotels, which be as low as 6% to as high as 11%, hosting an average of 8.6%.
As such, these percentages should be thought of as a starting point, said Chang.
“It's a useful piece of information for monitoring general trends, but it most certainly is not the end of the road, it's the start,” said Chang.
“Investors should be drilling much deeper than that, understanding the local market dynamics, the local flow of capital and the other forces driving the local market, and within those nuances, investors can often find unique opportunities.”
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
