Cap Rates May Be On The Road To Stabilization, Investors Say

Although economic headwinds are still blowing, investors are optimistic that capitalization rates have reached their peak and will stabilize soon.

Bond yields peaked at 5% in October before receding below 4% near the end of 2023, according to CBRE's second-half cap rate survey. And with yields at higher rates, the average cap rate increased from 6.4% to 7% in the second half of 2023. 

But survey respondents anticipate that cap rates are close to hitting their peak, with yields expected to decline and the Federal Reserve poised to begin interest rate cuts sometime this year.

“Amid tighter lending standards, the commercial real estate market has shown resilience,” Tom Edwards, CBRE global president of valuation and advisory services, said in a statement.

“Cap rates may be reaching their peak, driven by lower bond yields and the expectation that the Fed has concluded its rate-hiking cycle. By adapting strategies, investors can capitalize on stabilizing market conditions and position themselves to generate favorable risk-adjusted returns.”

The survey looks at 3,600 cap rates across 50 markets and incorporates responses from more than 250 CBRE real estate professionals. 

The largest cap rate increases came from Class-C office properties in commercial business districts, which saw an average rise of 100 basis points, according to the survey. Multifamily cap rates rose an average of 50 basis points, increasing at a faster pace in markets experiencing weaker fundamentals, like Charlotte and Orlando, Florida.

Neighborhood retail pricing was cited as the most stable in the survey.

Commercial property pricing overall plateaued in February but was down 7% over the previous year and down 21% compared to the March 2022 peak, according to Green Street's Commercial Property Price Index. Data shows that pricing should hold steady, Green Street said.

“Property pricing has stabilized over the past couple of months,” Green Street co-Head of Strategic Research Peter Rothemund said in the report. “Commercial real estate is now fairly priced relative to corporate bonds, so pricing should hold at current levels.”