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Cap Rate Commentary from Spencer Levy
Cap Rates Remain Surprisingly Stable
The fair-market value of any asset is what a buyer and seller are willing to accept at any given time. The three basic components of commercial real estate value—capitalization rate, current net operating income (NOI) and projected NOI—fluctuate based on macro-economic conditions: the profitability of leases with existing tenants and the likelihood and cost of securing new ones.
The bad news in the COVID-19 era is that at least two of these factors (current and projected NOI) are at risk, causing a pause in investment activity for most commercial real estate assets. The good news is that cap rates have remained relatively stable.
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“While investment volume remains subdued, the number of signed confidentiality agreements has risen sharply. This demonstrates that equity capital markets are deep and liquid, which will counteract much of the broader market risk and volatility.”