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Cap Rates Down, Investor Demand Up
Commercial real estate investment has all but bounced back from the depths of the pandemic, putting downward pressure on cap rates as investor appetite ramps up. According to CBRE’s recently released U.S. Cap Rate Survey H2 2021, expect more of the same in 2022, as investment volumes are anticipated to increase by 10%, year over year.
Survey respondents noted that the industrial sector experienced the highest cap rate compression in 2021, due to rent growth and growing e-commerce activity. Multifamily product also experienced cap rate compression, mostly in suburban areas.
Additionally, falling bond yields provided a benefit to real estate valuations; spreads between cap rates and bond yields have typically been a strong driver of property market investment flows and downward pressure on cap rates. CBRE expects the yield on the 10-year Treasury to increase to 2.3% in 2022.
“As the U.S. heals from the pandemic, investors demand for real estate has grown to new heights,” said Tom Edwards, Global President of Valuation & Advisory Services for CBRE. “Low cap rates for industrial and multifamily properties reflect solid fundamentals and rent growth prospects that characterize these sectors. Conversely, lingering uncertainty in the office sector suggests there is upward pressure for yields in this asset type.”
Respondents to the survey believe that low cap rates will continue in both the industrial and multifamily sectors in 2022, with cap rate contractions also taking place in retail, due to increased spending at brick-and-mortar stores. Office observations were a mixed bag, however, with survey participants split on whether cap rates across all markets would increase or decrease.
“Strong property market fundamentals, fueled by a robust economic recovery, will help maintain cap rates at current levels. While the crisis in Ukraine and associated sanctions bring some near-term uncertainty into play, we do not currently believe that will be too disruptive to the U.S. economic outlook,” said Richard Barkham, Global Chief Economist and Americas Head of Research for CBRE.
- ◦Sale/Acquisition
- ◦Economy
