According to the preliminary results of Real Estate Research Corporation’s first quarter 2011 capitalization rate survey, overall rates declined an average of 0.27% (27 basis points) from the quarter ended December 31, 2010, and now stand at 7.30%. Beginning with the quarter ending March 31, 2009, average rates have declined sequentially for eight consecutive quarters, from 8.33% at March 31, 2009 to 7.30% today.

What appears to be driving rates? We hear a lot of explanations including: it’s a relative value thing (real estate investment remains attractive as compared to alternative investment); it’s a reproduction cost thing (it’s cheaper to buy than to build and why take the lease-up risk); it’s the economy, stupid (we’ve turned the economic corner and fundamentals are going to improve rapidly); debt is available in size and at low rates (Securitization 2.0 is gaining traction); and it’s a jungle out there (there’s a lot of money chasing very few deals). Anecdotally, people are talking about some properties in gateway, 24-hour markets selling at capitalization rates reminiscent of pre-August 2007 levels. And apartments routinely selling at sub-6 rates!

Should we be concerned? Is there another bubble—maybe of a lower magnitude, but a bubble nonetheless—brewing? It’s your call. And in the food for thought category, the following are sequentially trended capitalization rates by property sector, courtesy of Real Estate Research Corporation:

 

1Q2008

1Q2009

1Q2010

1Q2011

All Property

6.58%

8.33%

8.40%

7.30%

Multifamily

5.90%

7.30%

7.00%

6.00%

Office-CBD

6.10%

7.70%

7.60%

6.60%

Office-Suburban

6.60%

8.20%

8.50%

7.70%

Retail-Mall

6.40%

7.90%

7.90%

7.10%

Retail-Neighborhood

6.50%

8.10%

8.30%

7.30%

Retail-Power

6.40%

8.40%

8.40%

7.40%

Industrial-Warehouse

6.60%

8.20%

8.10%

7.20%

Industrial-R & D

7.00%

8.50%

8.80%

7.80%

Industrial-Flex

6.80%

8.70%

9.00%

7.90%

Lodging

7.50%

10.30%

10.40%

8.40%

Source: Real Estate Research Corporation