NYC Cap Rates Look Stable Amid Interest Rate Rise

NEW YORK CITY-Notwithstanding a rise in interest rates, cap rates for Manhattan office should remain low for at least the balance of 2013, Brookfield Financial says in a new report. The finding is based on a 10-year trend analysis of the investment sales market here.

"Everyone is concerned about what rising interest rates will mean for cap rates, but our analysis reveals an implied resiliency in the Manhattan office market," says Eric Anton, managing partner of Brookfield Financial. Provided the interest rate climb is “slow and incremental” in the last few months of this year, “we project cap rates to remain stable."

The average spread between 10-Year Treasuries and Manhattan office cap rates is 220 basis points, and Brookfield Financial's report notes that Manhattan office cap rates remain well below the long-term average of 6%. The current spread is 3.8%, regardless of steady interest rate increases over the past two months.

"Manhattan cap rates will continue to demonstrate this resiliency despite the recent increases in the 10-Year Treasury Bond rates," Anton says. That being said, he cautions that cap rates will rise “if the yields on the 10-Year Treasury Bonds increase at the pace observed over the past several months."

Improving market conditions are the main driver behind the continued low cap rates for Manhattan office properties, Anton says. Strong buyer interest aided by historically low financing costs continues to drive up prices of properties and in turn depresses expected returns.

During the first half of 2013, Manhattan's office cap rate of 5.3% was slightly below Washington, DC and San Francisco, both of which had cap rates of 5.4%. Over the next six months, investors surveyed by Brookfield Financial expect the cap rate will hold steady despite the rise in interest rates.