There is no escaping the obvious: across all property types, in every subtype and niche, the trends in sales volume and yields are in sync. Sales volume has fallen with uncanny consistency by 71% over the past twelve months as investor appetites have subsided in equal measure across the property spectrum.
However, clues to current and future stress can be seen in the extreme spike in 2007 sales volume for office and retail. This market-peak surge in activity puts far more of these property types at higher risk for distress.
Yield measures, too, present a unified front of cap rates on the rise. Starting slowly in late 2007 as the credit crunch tightened its grip, caps have risen 100 to 150 bps with remarkable commonality. But there has been divergence as well, especially in the past six months: industrial and CBD office caps have spiked with particular vigor. One explanation could be that investors simply perceive more inherent risk in these assets. The more likely cause is the near absence of transactions in what were ultra low cap rate markets, such as CBD towers in the northeast and distribution centers in Southern California.
Cap rates also seem less reflective of the realities in the extremely challenged retail sector, where distressed situations are at the highest volume—$30.6 billion—of any property type. Cap rates have risen less than for other property types, yet the overwhelming consensus is that the retail industry faces the greatest challenges and poses greater risks for a property investor. This may be a selling opportunity over the near term. Eventually the market will price in these risks and retail cap rates should rise higher than for other property types.
On the other hand apartment cap rates are now closer to what other properties command than at any time in recent history yet debt costs have never been more different. The GSE’s are providing apartment investors with financing at far lower rates (up to 150 bps lower) than what is typically available for other commercial properties. This spread appears to offer apartment investors a buying opportunity. Apartment caps should continue to rise at a slower pace and ultimately end up at a lower level than other commercial properties. In addition to the financing advantages in the apartment sector, prices have been in a correction mode for much longer, causing it to miss the surge in activity and spike in pricing in 2007 that engulfed the retail and office sectors. Cap rates for apartments began their upward move three years ago as housing turned down, instead of in the past 18 months with the onset of the credit crunch.