Bottomed Out? Or Not? Report Sees Increasing Cap Rates

A big report released yesterday by New York's Integra Realty Resources, a national appraisal and consulting firm, projects real estate to continue to be a safe harbor for investors for the next three years.

It says its basic view is similar to that of NAREIT, the National Association of Real Estate Investment Trusts. IRR notes that the NAREIT five-year performance index has shown "that the real estate industry has both been more volatile and outperformed most other public investments," and is now "likely settling into a period of more sustainable long-term returns after outsized gains were realized on the heels of investments made during the challenges of
the 2007-08 recession."

Its 37-page "Viewpoint 2014" report says that "property fundamentals are expected to remain strong but have less room for improvement than five years ago."

But it says that cap rates also aren’t anticipated "to have much more momentum to compress further beyond current historic low range."

Still, the study concludes that the "overall positive view of value creation implies that any negative impacts of cap rate increases are deemed likely to be more than offset by positive improvements in underlying property economics."

 

The report has interesting charts, including real estate capital source comparisons, commercial mortgage back securities issuance totals, cap and discount rates across a wide variety of property types and in a variety of metropolitan markets, including, it says, increased Class B property analysis.  It also contains office, residential, retail, and industrial breakout data, as well as lodging and storage.

From the results of a survey conducted for the report, IRR says that cap rate compression  may have bottomed out:

For all asset classes, market participants perceive that the risks and likelihood of capitalization rates increasing more than 50 basis points is far greater than the positive likelihood that capitalization rates will further compress in the next three years. Thus, following the commercial real estate market’s recent post-recession cycle of cap rate compression, the industry seems to deem the likelihood that we are nearing a cap rate trough as far more likely than the potential to break through historical lows and maintain the current trend of continued rate compression.

The report also concludes that "perceptions about the relative ability (or inability) of owners to drive future property income growth was clearly identified as the strongest influence" driving cap rate movements in the near future, followed by local markets' supply and demand dynamics, and interest rates.

The report says that the historical influence of U.S. Treasury bond yields on cap rates is declining.

It concludes that the IRR survey shows that 

real estate values are likely to rise over the coming three years, driven mostly by improved property fundamentals which are likely to offset any potential slight increases in cap rates that may occur over this period.

You can download the report with registration HERE.

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