Delta: Cap Rates Peak, Prices Dropping

In its annual survey of the region's market makers the company reports, among other findings, that the average cap rate is 8.19% for all product types at year-end 2009, after rising 92 basis points in 2008. More than likely, Delta says, cap rates will not reach the cyclical peak of 9.5% in 2001. At the same time prices have dropped enough that investors are re-entering the market, especially for--not surprisingly--multifamily and Class A, low risk office products.

This cycle is moving faster compared to the last serious downturn in 1990, Delta CEO Greg Leisch tells GlobeSt.com. "I was surprised by the finding that cap rates for certain classes of properties may have peaked. That is a contrast to what we saw in 1990 when the price correction took much longer to wash out of the market."

One reason for that, Leisch speculates, is the elevation of commercial real estate in most institutional investors' portfolios. "In 1990, investors re-allocated real estate funds from 12% to 4%," he says. "This time, institutions have maintained their allocations."Leisch figures that if investors don't think the market has bottomed out, just yet, then the country is at least close to it and "it is time to consider prudent investment again in low risk real estate."

Other findings from the report show that cash on cost return requirements continue to escalate--another 100 basis points this year. Development costs, for their part, have declined significantly, down 11% for office space and 7% for apartments.

Still, though, the survey does not indicate a return to flush times by any stretch. Less than half --44%--of respondents to the survey, which was part of the report, say they believe 2010 will bring better business conditions than 2009; 71% of respondents focusing on the office sector believe conditions will remain the same as in 2009, with 29% stating conditions will improve. However, 37% of respondents focusing on the apartment sector believe conditions will remain the same as in 2009, compared to 47% stating conditions will improve.