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Report: Investors Anticipate Cap Rate Expansion

According to CBRE, cap rate expansion since early June 2022 has been “relatively modest at the high end of the market.” This has been due to the proliferation of all-cash buyers, along with investors (multifamily and industrial, specifically) willing to except negative leverage in exchange for strong rent growth.

CBRE’s “U.S. Cap Rate Survey H1 2022” reports investors as believing that cap rates will continue rising, primarily due to ever-tightening lending standards. Tighter monetary policies have led to increased borrowing costs which, in turn, have impacted some real estate transactions.

Survey respondents expect the following:

  • Greatest yield compression is anticipated among Class B and C assets, especially lower-tier office properties.
  • Loan spreads are expected to increase between 0 and 75 basis points by the end of 2022. While nearly a quarter of respondents believed that the Federal Reserve’s borrowing costs might trend downward in the mid-term, CBRE analysts said that the more aggressive policies suggest “very few would hold this view if the survey were held today.”
  • Lending terms are more restrictive. Respondents said they also anticipate fewer accommodations (especially among value-add deals) and expressed concerns about potential value erosion (meaning lower LTVs and higher debt-service coverage ratios).
  • Large CBD office markets are likely to remain under pressure, while sentiment is more positive about quality suburban neighborhood retail properties.
  • In addition to ongoing increases in the Effective Federal Funds Rates, concerns include the potential for recession, stretched consumer budgets and weakened e-commerce trade.
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