I'm in AM at a major institutional investor and from some of our fund investments it looks like MF cap rates and discount rates are moving up a decent amount. One major fund reported 50 bps expansion in cap rates. DR was 75 bps expansion I think. This is further borne out by Green Street's cap rate observer which recently showed MF cap rates up by 70 bps. Industrial cap rates were up 25 bps. My thought on this is that since MF gets marked to market annually, there isn't as much opportunity to grow NOI as rent growth slows. Given higher interest rates, cap rates are now moving up.But on the industrial side it seems different. There has been such strong rent growth the last couple years that you can buy at a low cap rate today, have some negative leverage in the short term, but roll rents 30%+ to market when leases roll, which gets you into positive leverage territory. Therefore, industrial cap rates don't need to expand as much as multifamily.Thoughts on this?
Trending Content
Career Resources
Seems like there are two questions here: first, how much industrial cap rates will move relative to multifamily cap rates, and second, how much both will move in absolute terms.
It wouldn't surprise me if you're right about the mark-to-market opportunities giving industrial an edge in relative terms. Being involved in this sector, I can say that leasing activity is still strong.
The bigger question, though, is the absolute movement. Is it really the case that we're going to see 25-75 bps of expansion when the 10-Year Treasury has moved 200 bps? You would think that the asset classes would ultimately maintain a somewhat more consistent risk premium over the risk-free rate.
I'm curious how much data these recent cap rate numbers are based on. Have there really been enough representative transactions in the past few months to know for sure, or are a lot of owners just slapping modest, maybe optimistic, cap rate increases on illiquid assets for the purposes of reporting values?
Right now, developing new buildings basically seems like gambling on what the Fed is going to do over the next 12-18 months. Projected exit caps are a total wildcard and their importance dwarfs the importance of the other numbers in the pro forma.
Appreciate the SBs, but really I'm trying to stress test this idea as much as I can.
The argument is extremely simple: stabilized industrial buildings (for example) are somewhat more risky to own than treasuries. Buyers are compensated for that risk by a risk premium, that is, stabilized industrial buildings provide higher returns than treasuries.
Logically, cap rates should increase by the same number of basis points that treasuries increase, unless the difference in risk between the real estate asset class and treasuries changes. And I'm not sure why the risk differential has changed significantly.
In historical terms, OP's reported industrial cap rate expansion of 25 bps is tiny. As recently as the early 2000s, industrial cap rates were pushing 9%. So a cap rate expansion of, say, 250 bps, while it would be a huge deal in the short-to-medium term, would not be shocking when viewed from a long-term perspective.
What are the best arguments that MFR and industrial cap rates will NOT rise by several hundred basis points?
Your concerns are why nobody is transacting in industrial. Sellers don’t want buyers pricing. Per Colliers- “For industrial, sales volumes had the biggest drop at 63%”
I think the main argument for why the spread between industrial cap rates and Treasuries could narrow is potential rent growth.
I think the market needs to be careful comparing cap rates today vs. cap rates from 15-20 years ago. Industrial in particular is a much different asset class today than it was a couple decades ago. There is much better credit in the asset class today and new buildings are primarily used for distribution rather than light/heavy manufacturing. Rent growth has also been much stronger than historicals (although that can obviously change), which impacts cap rates that buyers are willing to transact at. You could make a similar argument for multi as well. Much different demand profile today than 20 years ago, and the product being built is much different.
Some of the cap rate expansion metrics you’re quoting are a little stale IMO. I am seeing cap rates 125-150 bps wide today relative to where we were in 1Q22 (top of market pricing) - this is Sunbelt institutional MF product. Most of the data points GS and others track are factoring in trades that have recently printed but were priced back in the summer when 10-yr UST was generally sub-3%. I.e that’s not reflective of todays pricing. Majority of product that is pricing today but will not print until next quarter seems to be pricing with a 5 handle across the board (maybe high 4s for select assets, assumable debt situations, etc.). Also important to distinguish this is where stabilized deals are getting done today. For product that is prestabilized, those cap rates have probably blown out 200 - 250 bps given where floating rate money is pricing today.
Said succinctly, I think we have already seen the massive expansion in cap rates take place in MF (and assuming industrial) and it’s anyone’s guess what happens from here in 2023. Not a Harvard econ phd, lol.
What industrial has going for it - all the institutions seem to want it but there’s not enough of it to go around. Tough to quantify the impact that has on a cap rate.
Don't worry the Harvard economics PhD folks don't know either...
Dolore sed expedita et corporis. Perferendis tempore amet et qui. Repellendus earum nesciunt aut iure commodi quia.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...