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Cap Rates Reach Historically Low Levels for Apartments
By Doug Solether, 2016-06-14

 

Q1 2016 cap rates for apartment buildings hit historically low levels during the first quarter of 2016. The mean cap rate dropped 40 basis points to 5.6% in Q1. Not only is this a record low, it's the first time cap rates for multifamily have dipped below 6%. The 12-month rolling cap rate also reached an historic low of 6%. While this is significant, it's not unexpected and likely a consequence of continued low interest rates, not of irrational exuberance. And while it is difficult to envision cap rates for apartment buildings continuing to compress at a rate anything like what we saw in Q1, it's not expected that cap rates will increase much in the near term based on the outlook for apartment building fundamentals. Therefore, cap rates are likely to remain in the high-5% to low-6% range over the next year or so.

 

During the first quarter of 2016 the mean office cap rate declined by 20 basis points to 6.8%. However, this is actually up 30 basis points from the first quarter of 2015 when the mean cap rate stood at 6.5%, the post-recession low. The 12-month rolling cap rate was virtually unchanged at 6.9% and it has been effectively flat since the fourth quarter of 2014. So is cap rate compression over for the office sector? Not likely. The outlook for office fundamentals is still relatively optimistic. Office revenue growth should remain healthy for the next few years.

 

The mean retail cap rate for retail properties increased by 60 basis points during the quarter to 7.9%, more or less the opposite of the apartment sector. Cap rates for retail haven’t been this high since they were north of 8% in the first half of 2014. 12-month rolling cap rate was nudged only slightly upward. During the first quarter the 12-month-rolling cap rate increased by a small margin and remained at roughly 7.5%. The 12-month-rolling cap rate is 60 basis points below the historical average 12-month rolling cap rate, indicating that like most other property classes, pricing is currently a bit rich. And that’s important context, certainly in light of the upward cap rate movement this quarter. Cap rates are still low by historical standards, especially for high-quality properties. So the movement up this quarter, while certainly noteworthy, probably isn’t saying all that much, at least not yet.

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