Cap Rate Projections
With the 10 year hitting 4.80% today, what is your thoughts on where cap rates are heading over the next 12 months?
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Honestly, not good. For those of us whose careers started after '08, this has to be the beginning of the worst CRE environment of our careers.
To answer your question, the market is top heterogenous to apply a blanket statement, but cap rates are going up from here.
Multifamily - Class A multi in primary markets will clear 4.75-5.25%, secondary markets at 5.50%+, and tertiary above 6%.
Storage - 25-50 bps wide of multifamily.
Industrial - Buyers (and lenders) will begin to focus on credit again.
Office - is nuked.
Aren't multifamily cap rates already in the 5.25%+ range? Except for the PE funds that do not want to mark down their valuations, looks like recent trades have all been there. Additionally, the only thing im really seeing on our end trading at sub 5 caps are deals with tax abatement structures - particularly in Texas to lock in PFCs
Large city in the southeast here. Deals that are actually trading right now (which is 50% at best of the deals on the market) are trading between 5.25% and 5.50% and I'm betting 5.5% will become a "new normal" for a while. Absolutely brutal on the waterfall, even on deals that are still leasing at a fantastic pace with terrific rent growth. Super demotivational to crush it on construction and lease up and then get slapped in the face right around disposition time.
We're also seeing buyers actually care about submarkets within a city again. For a long time, it didn't matter if you were CBD or out in the burbs. The cap rate was 4 or lower, so there was a ton of money to be made in underserved submarkets, which we poured a lot of energy into. Now the underserved submarkets are getting slammed with higher cap rates than the traditional strongholds.
And with agency debt pushing well north of 6.5% now, buying multifamily at a 5.50% cap rate (especially with Texas' tax / insurance risk) feels really rich.
Yup. We have one deal previously under contract that just got re-traded by $7M (which we still accepted) and one deal that had a BOV adjustment from $78M to $71M. About to take it in the shorts.
I really feel for you there - have to imagine a good chunk of that $7M was promote.
Yeah luckily the $7M retrade took it from a grand slam down to like a triple so IF it transacts here in November it'll still make money, but the $78M BOV adjustment to $71M deal is just brutal. The home team might not even make $1M.
Good thing you're not in it for the money.
Hah, yeah I'm deeply passionate about surfaced parked suburban apartments
I don’t see how cap rates stay at 5.50% if debt is 6.5%. I think over time, higher rates (if they stay there) will start pushing cap rates to 6%+. Buy at 5.5%, you need to have over 100 bps of value add just to get to positive leverage. I don’t see this as sustainable. With that said, if you look at history - there is precedence for cap rates to be below interest rates in high rate environments. So maybe leverage goes down for the foreseeable future. But what do I know 🙈🤷♂️. Buy good real estate.
Was at a networking event with several execs of mid-sized acq shops. One of the execs for a larger shop told me interest rates will come down before he drops his sales price by a penny. Lets see how long they can hold onto this way of thinking.
Think about this using psychology. The brain for most of the people in the industry has been conditioned to believe that the last 13 years was normal. It was not. It was an anomaly related to poor planning by central banks around the world. For the fear of seeing another recession, they kept the gravy train going, but didn't understand that all they did was inflate multiple bubbles everywhere. There is just WAY too much liquidity in the market and its not going to change right now. Human beings are stubborn and resistant to change. I dont see people selling until they have too (ie. fundamentals worsening). Cap rates may adjust a bit but the spread we had before will take a few years at the minimum to see.
Thinking about all the NYC rent regulated buildings bought at 2 and 3 caps in 2017-18...
A firm I used to work for owned one of those. They got absolutely crushed. Completely.
It takes ~2 years for people to forget how much their assets used to be worth... if the world looks anything like it does today in a year I would bet cap rates keep going up
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