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Reis: Apartment Cap Rates Continue to Decline
Although the Federal Reserve keeps bumping up the overnight borrowing rate (three times in the past year, so far), apartment cap rates continue to decline. According to research from Reis Inc., the mean apartment cap rate dropped to 5.8% in Q3 2017, a drop from the 5.9% reported in the second quarter. Additionally, the 12-month rolling cap rate dropped 10 basis points to 5.9% in the third quarter.
Reis economist Barbara Denham writes that the continued low cap rates are “indicative of the healthy investor demand for apartment properties.” She pointed out that, while cap rates have tended to increase with interest rates in the past, “the causation is not as direct as the theory would suggest.”
Denham does deliver a handful of cautions, however. Selection bias, for example, could be exerting downward pressure on cap rates. Furthermore, she noted that sales transaction volume in the sector through Q3 2017 is trailing that of the first three quarters of 2015 and 2016. “The lower volume,” she said, “could suggest that the only properties trading are those that the sellers are getting the prices they want for them.”
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