Capitalization Rates for U.S. Commercial Assets Stabilized in Mid-Late 2015

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According to global property advisor CBRE Group, capitalization rates for U.S. commercial real estate stabilized over the second half of 2015, after several years of trending downward.
 
Cap rate movement over the second half of 2015 within the office, retail and multifamily sectors was too small to be considered significant. Cap rate movement in the industrial sector was also nominal, but was slightly larger than the other sectors and trended downward. 

Cap rates for hotel properties experienced the most movement, as investment activity declined noticeably in this sector. Cap rates for the central business district (CBD) hotel categories rose modestly, from 2-13 basis points (bps), with full-service CBD properties averaging 7.40 percent. Movement was higher for suburban product categories--rising from 15-25 bps--with full-service suburban properties averaging 7.84 percent.

"Commercial real estate is still very attractive due to strong property fundamentals--namely rental growth above historical averages--and hence rising values and returns that are greater than many other non-real estate asset classes. Additionally, cross-border capital shows every sign of rising significantly in 2016, as was evident even before the FIRPTA regulations for qualified pension plans were changed at the end of the year. Overall, investment activity should be strong enough to keep cap rate pricing fairly stable over the coming year, with any upward pressure on rates mostly isolated to Class B and C product and Tier III markets," said Jeanette Rice, Head of Investment Research, Americas, CBRE.

"Looking ahead, cap rates will remain largely steady during the first half of 2016, with little to no change expected in more than 60 percent of markets. In markets where change is anticipated, cap rates are more likely to increase, albeit modestly," added Rice.

Other Key Report Highlights Include:

• CBD office cap rates were essentially stable for all classes. Cap rates for stabilized CBD property acquisitions edged down slightly and returns on cost for value-add acquisitions edged up slightly; however all of these changes were too small to be significant (less than 15 bps).

• Similarly, cap rates for suburban office changed very little. Cap rates for Class A properties fell 5 bps to 6.80 percent; Class B compressed 11 bps to 7.81 percent; and Class C remained stable.

• Industrial cap rates declined slightly for acquisitions of stabilized assets. Cap rates for Class A industrial space dropped 14 bps to 5.59 percent; Class B edged down 11 bps to 6.65 percent; and Class C declined to 8.11 percent. Expected returns on cost for value-add assets also compressed modestly.

• Cap rates for Class A infill multifamily properties are the second lowest of all product types, at 4.57 percent--above only high street retail at 4.24 percent. Suburban Class A multifamily cap rates are the third lowest at 4.99 percent. Cap rate conditions for both infill and suburban multifamily acquisitions were essentially stable over the second half of 2015, however, returns on cost for suburban multifamily experienced more noticeable declines.

• Cap rates in the retail sector were essentially unchanged from H1 2015 to H2 2015, as nearly all changes for stabilized assets averaged 11 bps or less.