Farewell, Cap Rate Compression

Has Houston reached a cap rate trough? IRR predicts valuations across asset classes will stabilize this year. (It's fun to get a little crazy for a few years, but we all need to settle down at some point.)

IRR managing director Kenneth Levenson says that in general, the likelihood of caps increasing is 50% greater than further compression in the next three years. But he still anticipates pockets of decreasing caps, especially in new core office buildings and high-end multifamily product. IRR predicts Class-A and B apartment communities won’t stabilize for another two years thanks to above-average absorption: Forecasts call for 8,000 units absorbed annually for the next three years, up from 6,000 units annually from 2010 to 2013.

Kenneth says retail is very interesting because it’s the opposite story. Lower-quality properties have lagged in the recovery and they’re just now filling up as mom and pops feel secure enough to sign new leases. (As long as being in business together doesn't strain their marriage, because nobody wants to go to mom and steppop store.) As income increases in these smaller strip centers, their caps will compress. Overall, Kenneth doesn’t anticipate 2014 will see a huge market shift. He predicts Houston valuations will stabilize, but we’re still in expansion phase as a whole. With fundamentals like population immigration and new business increasing, we’re poised to have another strong year.