Interest Rates Up, Cap Rates Barely Budge

The Fed hiked interest rates four times in 2018 and the yields on 10-year Treasurys ended the year up 30 basis points, but despite these macroeconomic factors, U.S. CRE cap rates overall haven't moved that much recently, according to new reports by CBRE and Cushman & Wakefield.

There have been modest movements in some property types and classes. CBRE found that industrial cap rates tightened marginally across all segments in the second half of 2018, while office, multifamily and hotel cap rates were generally stable.

“Investment activity remains robust, driven by a strong economy, significant amounts of capital, and a sense that supply and demand in real estate markets is very well balanced," CBRE Global Chief Economist Richard Barkham said. "Cap rates were very stable in 2018, and pricing firm."

According to Cushman & Wakefield, industrial yields increased modestly due to a shift in product mix to include more Class-B properties. Class-A yields continued to compress, with the strongest compression in secondary and tertiary markets.

On the other hand, Cushman & Wakefield found that office yields fell sharply in the major metros, due to a shift in the asset mix (especially in major metro suburbs) toward Class-A product, which continues to trade at a large premium to Class-B and -C product.

The trend of falling office yields in major metros has been ongoing for some time now, with investors seeking out less expensive properties in non-major metro markets, where cap rates are comparatively less compressed.

Retail cap rates continued to rise modestly, with increase muted in the major metros, Cushman & Wakefield notes. Cap rate increases were driven by Class-B and C segments, while Class-A yields seem to have stabilized.

CBRE expects cap rate stability during the first half of 2019, though not all property types or classes will have the same experience.

"Office and retail assets are getting less durable, while the cash-flow streams of industrial and multifamily assets are getting stronger," CBRE Americas Research Chairman Spencer Levy wrote.

Cash-flow durability in office and retail seems less certain now, with the rise in shorter-term lease or license agreements in retail and declining renewal rates in office properties, Levy said. But cash flow streams in industrial and multifamily are getting more durable, as tenants in those sectors are signing longer leases.

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