Market Cap Rates

Curious to hear the community’s take on neighboring markets that have underlying similarities, but different market cap rates.

Example …
1. San Francisco vs. Oakland
2. Washington DC vs Baltimore
3. Dallas vs. Houston
4. Tampa vs. St Petersburg

For the most part, these markets trade at different market caps. However, the people living in these markets have roughly similar incomes, rental payments, and the markets are generally drawing from the same employment base (though not exclusively). Often, the markets that have a higher market cap seem to have lesser supply side pressure, as well. There may be some nuance to qual of life, or regulatory risk, etc, but largely, these markets are very similar as it relates to riskiness of cash flow, to the extent that a cap rate is a general proxy for risk.

Would love to hear how others think about this…

 

I'd think of it from a persepctive of growth potential as well. Lower cap rates make sense if you have strong faith in future growth of the area so that a few years down the line your top line increases faster.  Investors are more excited about the growth of the Dallas economy than the Houston economy. 

 

Can only speak to Dallas / Houston relationship as we underwrite both frequently. Would echo the sentiment above. Dallas has a much more diversified and stable economy. Houston more boom or bust, obviously as it relates to energy. But my understanding is there are almost no zoning regulations so when the market heats up you can start to see a lot of new supply very quickly. All leads to more risk hence a wider cap rate

 

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