CBRE Survey Reveals Continued Strong Industry Fundamentals

CBRE's latest cap rates survey predicts business as usual for all property types, but offers a few warnings, as well.

Cap rates for commercial real estate saw little movement in the second half of 2015 over the first half, as all cap rates for office, retail and multifamily were too minimal to be significant, according to a recent survey from CBRE North America.

Spencer Levy

Spencer Levy, Americas Head of Research, CBRE

The only sector with a more significant change was hotel, which registered slightly higher cap rates due to a more noticeable decline in investment activity.

“Big picture is that real estate fundamentals across the five major appetites are strong. We have a strong foundation in all five types,” Spencer Levy, CBRE’s Americas head of research, told Commercial Property Executive. “I think capital flows are also strong, both domestic and foreign. We’ve been seeing a conflict between strong fundamentals from the basic categories of investors.”

Office

The report noted that cap rates for stabilized CBD office properties were essentially unchanged at the national level from the first half of 2015 to the second. One exception was for Class AA properties, which fell 10 basis points (bps) to 5.2 percent.

Additionally, Tier III markets experienced slightly larger declines than Tier I and II markets, although they were still modest. Across all classes, Portland experienced the most downward movement in cap rates. Other Tier III markets that observed notable cap rate decreases in various classes were Columbus, Ohio; Kansas City, Mo.; Las Vegas; and Tampa.

Retail

The report revealed that retail overall lagged behind the other sectors in rent growth, with many markets only now turning positive.

“The good news is that it does provide plenty of upside in retail because rents recovered across the board,” Levy said. “The other headline here is that there is virtually zero new construction and it’s unprecedented how little there has been in the U.S. The limited supply growth and laggard of rental growth provides a great opportunity for people who want to invest in the space.”

Industrial

Levy noted that the industrial asset class has gotten more attention in the past several years, and while it has always attracted REIT interest, it never got the headline attention that hotel or office or retail did.

“Industrial is the new retail, and we say that because of the changes due to e-commerce,” he said. “So many industrial facilities are now distribution centers for goods bought online. International investors have really discovered the asset class.”

Looking Ahead

According to Levy, there’s little to no change expected across all property types for the first half of 2016 for more than 60 percent of markets. That said, in markets where change is anticipated, cap rates are more likely to increase rather than decrease.

“Most institutional investors still expect to buy more in the U.S. this year than they did last year,” he said. “Retail investors are a little more mixed than that, but we have seen a remarkable turnaround in the market in the last six weeks. It went from good to bad to good again in 90 days. That’s the kind of market we are in today.”

The report noted that approximately 20 percent of markets may experience increases of as much as 25 bps, versus only 10 percent of markets that may experience decreases. Less than 5 percent of markets are likely to experience movement greater than 25 bps in either direction.