Are Cap Rates Approaching a ‘Soft Plateau?’

Richard Barkham, Global Chief Economist & Head of Global and Americas Research, CBRE. Image courtesy of CBRE

Interest rate volatility has pushed up cap rates in the first half of 2023, according to CBRE’s latest report.

CBRE concedes that market conditions are fluid, but calls the survey “a useful baseline [that] sheds light on how investor sentiment is changing.”

The survey was conducted in late May and early June and reflects transactions during the first half of this year, incorporating more than 3,000 cap rate estimates across more than 50 geographic markets. More than 200 CBRE capital markets and valuation professionals completed the survey.

CBRE cautions that in this environment of limited capital availability and unusually low sales volume, estimating cap rates “remains challenging.”

“But as inflation slowly declines and the Fed nears the end of its rate-hiking cycle,” the report continues, “we anticipate prices will generally stabilize toward the end of the year, with office values stabilizing in early 2024.”

Indeed, the survey suggests that cap rates overall have risen more slowly so far this year than in the second half of 2022.

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Helped along by what CBRE describes as “improved fundamentals, income growth and attractive pricing,” retail has seen the smallest cap rate increase. Because of concern about oversupply in some markets, underwriting for industrial has become more conservative, especially for non-stabilized properties.

Meanwhile, CBRE says, “Office cap rates widened most sharply as investors demanded greater pricing discounts amid an uncertain outlook.”

Better times ahead?

To the extent that some investors see the Fed’s cycle of interest rate hikes ending soon, more certainty about interest rates “could be a catalyst to bring buyers and sellers together. In that scenario, the next six months could bring greater transparency and liquidity,” CBRE predicts.

In a substantial change from the cap rate survey of six months ago, many CBRE professionals too think that yields will stabilize later this year, based not just on an end to the Fed’s tightening cycle, but also because of progress on inflation.