CBRE Survey: Cap Rates to Return to Pre-Pandemic Levels for Industrial, Office and Suburban Multifamily Properties
DALLAS — Industry professionals believe the commercial real estate values for industrial, office and suburban multifamily properties across the United States are expected to return to pre-pandemic levels or remain stable, hinting at a potential full recovery for the rest of 2021, according to a CBRE Group Inc. survey released on Aug. 31.
CBRE’s survey looked at capitalization rates for stabilized assets and investment sentiment on market conditions. Capitalization rates measure a property’s value by dividing its net operating income by its sale price and a lower cap rate generally shows a higher value. In the survey, investors predicted cap rate movement will vary across different property types for the second half of 2021. For example, cap rates for industrial and multifamily properties are expected to compress in most markets, while the cap rates for office, retail and hotel properties are expected to stay steady.
The survey also found that investors were willing to purchase industrial and multifamily properties at a premium or higher price than other property types. Additionally, investors looked mainly for small to moderate pricing discounts for office properties, and moderate to large discounts for retail properties and hotels. More than 75 percent of real estate investors showed a higher risk appetite in the first half of the year, with just a few investors avoiding risky investments, according to the CBRE survey.
“The rapid recovery across U.S. real estate markets was mostly made possible by the massive fiscal and monetary response to the COVID-19 downturn that stabilized the economy and benefited property values,” says Chris Ludeman, global president of capital markets for CBRE. “While some uncertainty remains, a strong economic recovery will continue to benefit property fundamentals, investment volumes and values.”
Due to the COVID-19 pandemic that created economic turmoil in 2020, CBRE’s survey compared the first half of 2021 with the pre-pandemic cap rate levels of the second half of 2019, instead of the second half of 2020. This was so there could be a more accurate assessment, since COVID-19 impacted the economy strongly this time last year. The survey found the following about the compared cap rates:
• While commercial real estate markets were severely disrupted in mid-2020, recoveries were well underway by year-end, and today cap rates across property types are at or below pre-pandemic levels in many markets.
• The pandemic affected certain real estate sectors more than others. Every industrial market reported lower cap rates than in the second half of 2019, reflecting strong investor appetite because of increased e-commerce demand during the pandemic.
• Suburban multifamily properties fared better than properties in cities or more urban areas. No suburban multifamily market reported an increase in cap rates, with the majority reporting cap rate compression compared with the second half of 2019. This reflects strong market fundamentals during the pandemic, with many residents seeking more space, lower density and less expensive rents in the suburbs.
• Even though most people were working from home during the pandemic and there was uncertainty of when this would end, office CBD cap rates remained stable or compressed across most of the top 25 markets. Most suburban office markets saw cap rates remain stable or compress as the strong policy response to the pandemic helped to stabilize the economy and support values. Some of the cap rate compression may also be due to changes in underwriting, as lower net operating income impacted cap rates.
• While hotel and retail cap rates increased slightly, a few number of closed transactions may have understated the extent of the movement.
— Julia Sanders