Cap rates for real estate across most asset sectors is expected to remain stable in the second half of 2015, following a first half during which the U.S. commercial real estate market continued to perform well and attract substantial investor interest.
According to the CBRE North America Cap Rate Survey, which tracks activity in 46 major U.S. markets and 10 markets in Canada during the first six months of the year, national cap rates for industrial facilities in the U.S. experienced “very modest” cap-rate declines of 10 to 19 basis points. CBRE estimates that cap rates for stabilized Class A industrial assets was 5.65%.
Class A infill multifamily cap rates were 4.57% in the first half of the year, the second-lowest of all product types. The retail sector had the most significant national cap rate compression, followed by hotels. CBRE suggests that retail and hotels were the sectors that took the longest to recover from the past recession, “therefore, it is not surprising that the cap rate declines are greater in these sectors than those more mature in the real estate cycle.”
Central Business District Class B and C office cap rates were slightly off in the first half, but not Class A offices, “one example of investors moving out of on the risk curve,” CBRE notes. And despite sales volume gains, suburban office cap rates rose, on average, by 7 basis points.
Details from this report, as well as CBRE’s near-term predictions, include the following:
• Interest rates, a big demand driver in the commercial real estate space, are expected to rise modestly. The 10-year Treasury is projected to increase to 2.61% in the second half of 2015, and to 3.19% in 2016. However, “the near-term outlook of higher interest rates is not necessarily going to translate into higher cap rates if the rates come from stronger economic growth, as expected, as opposed to an unexpected shock to the economic system,” CBRE writes.
• CRBE doesn’t expect any cap rate movement in the second half of 2015 for office assets in the majority of markets, and only modest declines in those asset classes that do change. Jacksonville and Cincinnati are expected to experience the largest cap rate declines in Class A acquisitions.
• Transaction activity in the U.S. industrial sector during the first half of 2015 rose 70% to $37 billion. CBRE expects the full-year gain over 2014 to be 40% or greater. Cap rates in this sector are expected to fall modestly in more than one-third of the markets surveyed. Larger declines of 25 basis points or more are expected in Class B and C stabilized properties in Philadelphia and St. Louis. On the other hand, 58% of the market surveyed should experience no change to stabilized industrial cap rates.
• Retail investment in the first half of 2015 rose 12% to $45.6 billion. The “mall and other” category in this sector grew by 14%. CBRE expects investment to accelerate modestly through the remainder of the year. As far as cap rates are concerned, Class B experienced the largest average decline of 24 basis points. And four markets—San Jose, San Francisco, Los Angeles, and Orange County, Calif.—all had Class A caps under 5%.
• In the first six months of 2015, sales of multifamily properties jumped 38% to 63.2 billion. One-third of that capital went to mid- and high-rise projects. For Class A infill assets, San Francisco had the lowest cap rate, at 3.75%. Of the 44 markets surveyed in this sector, 33 had cap rates of 5% or less. CRBE is predicting no cap rate change for acquisitions of stabilized infill multifamily assets in the second half of the year for more than 80% of the markets surveyed. But cap compression should occur in Nashville, Washington D.C., Baltimore, Indianapolis, and Detroit.
• Investment in U.S. hotels, at $26.9 billion, was 67% higher than in the first half of 2014. The vast majority of hotel investors are domestic, especially outside of major cities. CBRE suggests, though, that hotel pricing, as measured by cap rates, has peaked for high-end products in top-tier markets. “But it’s too early to definitively make that call,” it writes. CRBE expects cap rates for acquisitions of stabilized hotel properties to remain “broadly stable” in the second half of 2015, with 62% of markets tracked experiencing no change. Any noticeable compression is likely to occur in Tier I metros like Las Vegas and Orlando, and Tier III markets such as Tampa, Jacksonville, Austin, and Pittsburgh.
Related Stories
| Dec 23, 2013
First Look: KPF's dual-tower design for Ziraat Bank in Istanbul
Kohn Pedersen Fox Associates (KPF) is designing a new headquarters for Turkey’s largest and oldest financial institution, Ziraat Bank, in a modern, suburban district of Istanbul.
| Dec 20, 2013
Can energy hogs still be considered efficient buildings? Yes, say engineers at Buro Happold
A new tool from the engineering firm Buro Happold takes into account both energy and economic performance of buildings for a true measure of efficiency.
| Dec 16, 2013
Major renovation for historic Northwestern Building in Minneapolis
Minneapolis’s Northwestern Building, originally built in 1914 as a glass factory, is undergoing a major renovation. The 85,000-sf, four-story building is now serves as office space for multiple tenants in Minneapolis’ North Loop neighborhood.
| Dec 13, 2013
Safe and sound: 10 solutions for fire and life safety
From a dual fire-CO detector to an aspiration-sensing fire alarm, BD+C editors present a roundup of new fire and life safety products and technologies.
| Dec 10, 2013
16 great solutions for architects, engineers, and contractors
From a crowd-funded smart shovel to a why-didn’t-someone-do-this-sooner scheme for managing traffic in public restrooms, these ideas are noteworthy for creative problem-solving. Here are some of the most intriguing innovations the BD+C community has brought to our attention this year.
| Dec 4, 2013
First look: Dubai's winning bid for World Expo 2020 [slideshow]
Dubai has been chosen as the site of the 2020 World Expo. HOK led the design team that developed the master plan for the Expo, which is expected to draw more than 25 million visitors from October 2020 through April 2021.
| Dec 4, 2013
Meet the 'world's greenest building': One Angel Square
The 500,000 sf, 14-story One Angel Square in Manchester, England, is being promoted as "the most environmentally-friendly building in the world."
| Nov 27, 2013
Wonder walls: 13 choices for the building envelope
BD+C editors present a roundup of the latest technologies and applications in exterior wall systems, from a tapered metal wall installation in Oklahoma to a textured precast concrete solution in North Carolina.
| Nov 26, 2013
Construction costs rise for 22nd straight month in November
Construction costs in North America rose for the 22nd consecutive month in November as labor costs continued to increase, amid growing industry concern over the tight availability of skilled workers.
| Nov 25, 2013
Building Teams need to help owners avoid 'operational stray'
"Operational stray" occurs when a building’s MEP systems don’t work the way they should. Even the most well-designed and constructed building can stray from perfection—and that can cost the owner a ton in unnecessary utility costs. But help is on the way.