According 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.
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%.
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.