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
