Cap Rates Continue to Decline

Commercial real estate remains a very attractive investment option for both domestic and inbound investors, due in large part to the continued low interest rates and lack of comparable alternative risk-adjusted investment options, according to PwC’s 2Q13 Real Estate Investor Survey.

Among the 34 markets highlighted, the combined overall capitalization rate fell to 6.91 percent in 2Q13, according to the report. The aggregated rate, which excludes the hotel, development land, and secondary office sectors, sits just four basis points above the lowest combined average since 1997. Cap rate compression combined with the unpredictable economy and slow commercial real estate recovery has spurred concerns about overpricing in some sectors and markets, according to the report.

While the disparity between office rent growth projections and cap rate compression is unevenly dispersed across the U.S., cap rate declines and initial-year rent growth forecasts in the apartment and warehouse sectors have moved “more in sync” with current and projected fundamentals in most of the U.S. metros surveyed.

“Cap rates are still trending downward, but the improving dynamics of these sectors, and not just cap rate compression, are helping to restore values, which should benefit property owners when cap rates inevitably rise,” according to the report.