PwC: Cap rates continue downward in Q1 2011

June 20th, 2011  ::  Posted by CRE Console

PwC Real Estate Investor SurveyAccording to the most recent PwC Real Estate Investor Survey, cap rates fell across the board for office and industrial asset types.

Titled “Signs of Recovery Boost Optimism for 2011″, the survey noted:

“Surveyed investors sense that the commercial real estate industry is moving past the bottom of the cycle, but the speed at which the US economy is improving fundamentals has been slow and uneven at best,” said Mitch Roschelle, partner, US real estate advisory practice leader, PwC. “However, as investors become more confident about the long-awaited recovery of the industry, they are eager to get deals done. This bodes well for the industry as the volume of capital chasing deals is expected to increase in all sectors as investors work to deploy capital before interest rates rise, overall cap rates increase, and the industry shifts more in favor of sellers.”

Others were still cautious of the challenges ahead:

This year is a pivotal one for the industry, as 2011 began on the right foot with a string of positive news, giving investors the feeling that the recovery is real,” stated Susan Smith, editor-in-chief of PwC’s quarterly survey. “That said, there remain concerns among surveyed participants, such as rising oil prices, a still-shaky residential housing sector, and upcoming debt maturities. Despite these challenges, many investors remain focused on acquiring assets in anticipation of a continued recovery. Strong competition among buyers and the low-interest-rate environment continue to push overall cap rates lower for nearly all of the Survey’s markets.”

Evidence of capital chasing deals can be seen in across the board declines among all asset classes.

Apartment, Retail, NNN Cap Rates

Apartments, one of the most pursued asset classes, continued to see cap rates decline, but at a slower pace than previous quarters, down 22 basis points, settling at 6.29%. Apartments are down more than 150 basis points since this time last year. This translates to a 25% increase in price (holding NOI constant even as rents increased) over the last 12 months. If you were buying multifamily product in 2009 and early 2010, you’re looking pretty smart.

Among the retail sector, Power Centers led declines with a 28 basis point decline breaking through the 8 handle to rest at 7.80%.

Office, Industrial Cap Rates

Flex/R&D lead the declines with a drop of 25 basis points to 8.90%. Warehouse product was close behind with a 22 basis point decline.

Declines in CBD office slowed, following its Q4 2010 decline of almost 50 bps and now rests at 7.42%, the lowest in this segment.

[PwC Real Estate Investor Survey]

4 Responses to “PwC: Cap rates continue downward in Q1 2011”

  1. Joshua says:

    Ok, I have got to say – “However, as investors become more confident about the long-awaited recovery of the industry, they are eager to get deals done. This bodes well for the industry as the volume of capital chasing deals is expected to increase in all sectors as investors work to deploy capital before interest rates rise, overall cap rates increase, and the industry shifts more in favor of sellers.” – makes almost no sense.

    1. A rise in interest rates is bad for financing, good for the price you pay. Cuts either way depending on view.

    2. CAP rates increase – as in spread compression or a higher number? Based on the use of higher and lower in the report, it means a higher number. I like higher numbers in the CAP rate column.

    3. Market favors more Sellers? You mean like the one we are in where Class A CRE has a ton of money being thrown at it simply because of terrible bond yields? I’d say those folks are in a Seller’s market. And any time you have a ton of money chasing deals, it causes competition, not something desirable.

    It astounds me the way these institutional types think. Complete disregard for anything other than today and what message they want to send. I read something very different in their data than the PR quotes would seem to want me to think.

  2. CRE Console says:

    Did you see this article on National Real Estate Investor? Same thing -
    http://nreionline.com/distressedinventory/cap_rate_rise_0614/

    Higher interest rates that drive up cap rates will not necessarily imply a decline in commercial real estate values. It simply means that increases in value will slow down. Coupled with the continued recovery in drivers of income like rents and occupancies, that implies rising cap rates in 2012.

  3. Joshua says:

    I did see that. While it may be technically correct that you could have value creation on the rent/occupancy side, that generally is not a core or institutional type deal that all the money is cashing. I also wonder if people realize what 1% in interest really means for NOI growth. Unless the economy really turns around 8% growth is not going to happen on most deals and a huge CPI increase will mean negative news for the people shopping at retail centers, paying rent for an apt or staying in a hotel. Oh well, some times I wonder why I care what that set thinks and says.

  4. Ted says:

    There’s more hype in the world of real estate than there is on Wall Street. The idea that money is chasing deals is ridiculous. What I see is distressed sellers and opportunistic buyers. No pick up is evident, except for a brief spurt of activity in Q4-10. Cap rates are coming down because fundamentals are bad.

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