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Making CRE Cap Rates Work in Your Favor
A recent CBRE report suggested that cap rates will likely increase later in 2023 due to higher borrowing costs and ongoing economic uncertainty. Cap rate expansion could be problematic for property owners and sellers. Such an increase could suggest lower valuations, a property’s inability to generate substantial income and high vacancy rates.
Or not.
A recent article from Matthews Real Estate Investment Services suggested that there could be some good in those higher cap rates. For one thing, higher cap rates could mean lower purchase prices relative to net operating income. “This can translate into a higher rate of return on investment, making the property more attractive to potential buyers,” the report noted.
Higher cap rates could also suggest opportunistic plays. Property owners could be more willing to negotiate with potential buyers for a sale if a high cap rate is linked to market distress.
The above-mentioned CBRE report indicated that cap rates could peak by the end of 2023 and begin to decline next year. In the meantime, the Matthews Real Estate report suggested some ways to combat the current increasing cap rates:
- Increase property income by raising rent, reducing vacancies or adding amenities to generate more income
- Reduce expenses by negotiating better contracts with vendors, cutting back on unnecessary costs and finding ways to reduce energy usage
- Improve the property condition through renovations, systems upgrades and curb-appeal enhancements
The article also suggested that repositioning the property might be a solution but a capital-intensive, long-term one.
The takeaway was that high cap rates shouldn’t be regarded as solely bad news. Depending on the context, higher cap rates could be advantageous for buyers. In the meantime, property owners and investors can – and should – take steps to help improve NOI, thereby reducing cap rates and increasing values.
- ◦Financing
- ◦Economy
