Cap Rates Flatten in Retail, Office, Apartment Sectors

Buyers’ preference for high-quality, lower-risk assets has caused retail, office, and apartment capitalization rates to level off, according to ReisReports, a provider of commercial real estate data. Apartment and retail cap rates are leveling off near pre-recession levels, while office cap rates remain near their early 2009 levels.

The flight to high-quality assets has been especially evident in the apartment sector, where mean cap rates have been falling since 3Q09 and now stand at 6.3 percent. The sale of high-quality assets created a pricing disconnect between buyers and sellers. Buyers have been reluctant to pay what they perceive as high asking prices, and sellers seem content to hold until properties buyers raise asking prices.

Mean office cap rates have fluctuated over the past several quarters and now stand at 7.3 percent, up 7.0 basis points from 4Q11. But the rolling 12-month cap rate seems to indicate slower cap rate compression rather than a trend reversal. Similar to apartments, high-quality office space was commanding high prices, but investors now appear to be less interested in paying premiums. The report notes that office fundamentals are on shakier ground than apartments. Retail cap rates, which remained virtually unchanged in 1Q12, are a similar story to office. Investors have backed off from high-quality assets, and new development is unrealistic in most markets.