Salt Lake City – March 2, 2017 – Capitalization rates on U.S.
commercial real estate remained largely stable in the second half of last year,
as prices softened slightly, according to the latest research from global
property advisor CBRE Group, Inc. Ongoing investment demand, especially from
foreign buyers, counteracted the rise in interest rates and cyclical factors.
The CBRE North America Cap Rate Survey
provides insights on movements for the major property asset classes. Cap rates
in the second half of 2016 either largely stayed the same or increased slightly
compared to the first half of the year. The industrial sector remained the most
stable sector, benefiting from market expectations that it will have stronger
rent growth than other asset classes in 2017.
“The second half of 2016 was
noteworthy for the election of Donald Trump and a Republican-controlled
Congress, as well as a rising interest rate environment. Late cycle factors
combined with rising interest rates put pressure on pricing towards the end of
the year; however, strong capital flows, especially from foreign investors,
meant that cap rate expansion was only modest,” said Spencer Levy, Americas
Head of Research, CBRE.
“Despite concerns about capital flow
controls in China, inbound real estate investment from that country in the last
two months of the year was very strong. For the first time since 2007, China
was the largest foreign investor in U.S. real estate, accounting for
approximately one-quarter of total cross-border investment,” Mr. Levy added.
Among the major commercial real estate
Robust fundamentals, along with
record-setting metrics for net absorption and rental rate growth contributed to
the industrial sector remaining as the most stable asset class. Tenant demand
exceeded new supply last year and that trend is expected to continue in the
coming years. A large majority of markets expect industrial cap rates to remain
unchanged in H1 2017 for both stabilized and value-add properties.
“The U.S. logistics sector has emerged
as a preferred asset class for institutional investors both domestic and
foreign. Global investors have targeted the sector for both acquisitions and
development, especially opportunities with scale. New economic drivers such as
e-commerce and the entire supply chain model, including the “Last Mile”, are
creating further growth in the sector,” said Jack Fraker, Vice Chairman &
Managing Director, Industrial Properties, Capital Markets, CBRE.
“Industrial assets provide institutional
investors with reliable and predictable returns with very manageable operating
expenses. Investors and their asset managers like the fact that tenants have
very high renewal probabilities that significantly mitigates leasing costs such
as new tenant improvements and leasing commissions,” added Mr. Fraker.
Cap rates for stabilized and value-add
CBD properties exhibited little movement in H2 2016, particularly for
properties in Tier I and Tier III markets. Suburban office cap rates, on
average, increased by 10 basis points (bps) despite the fact that fundamentals
(rent growth expectations) are similar or exceed CBD overall at this stage of
The multifamily sector continued to
reflect the lowest cap rates among the major property sectors. Cap rates
widened marginally in H2 2016 and generally maintained historically low levels.
Nearly all of these increases were by less than 10 bps. Slightly larger
increases were seen in the Class A and the Tier I groups, partly due to the
impact of new supply. The multifamily outlook for H1 2017 is for stable cap
rates for about half the markets and small increases (mostly less than 25 bps)
for the remainder.
“Currently multifamily investment
assets in the Salt Lake market can be characterized as strong and steady,”
remarked Patrick Bodnar, Senior Associate of the Salt Lake
City office of CBRE. “Our consistent job growth, low unemployment rate, and
high population growth rate—double the national average—are fundamentals
greatly valued by investors. As Salt Lake City continues to deliver on these
fundamentals, we will continue to experience a strong investment market.”
Despite increasing negative “chatter”
about the retail asset class as a whole, the softness was concentrated in Class
B & C retail power centers, with cap rates in Class A retail stable. The
retail sector had a fundamentally good year in 2016 with rising rents and
occupancy and this is expected to continue in 2017.
Increases in hotel cap rates slowed in
H2 2016. All segments and geographic regions recorded modest single-digit
upticks in cap rates, with the exception of suburban-economy, which fell by 1
bp. These movements were less pronounced than in H1 2016 and slight compared
with other property types.
The full CBRE North America Cap Rate
Survey H2 2016 contains additional market summaries and commentary as well as
Canadian data. To download a copy click here.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500
and S&P 500 company headquartered in Los Angeles, is the world’s largest
commercial real estate services and investment firm (based on 2016
revenue). The company has more than 75,000 employees (excluding
affiliates), and serves real estate investors and occupiers through
approximately 450 offices (excluding affiliates) worldwide. CBRE offers a
broad range of integrated services, including facilities, transaction and
project management; property management; investment management; appraisal and
valuation; property leasing; strategic consulting; property sales; mortgage
services and development services. Please visit our website at www.cbre.com.
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