RCA Insights

Fed Raises Again but Cap Rates Aren’t Budging

By on June 14th, 2018

Preliminary figures for May suggest that U.S. deal volume slipped again in the month. Pricing, though, continues to remain tight, with cap rates at or near record low levels.

Low cap rates and uncertainty on what happens next is part of the reason why deal volume fell in May. Just yesterday, in a move that had been expected for some time, the Federal Reserve raised its target range for the fed funds rate by 25 bps to 1.75%-2%. The minutes of the meeting show expectations for additional rate hikes in 2018.

This move on the short end of the yield curve might push up longer-term rates such as the 10yr US Treasury. The fear is that upward pressure on the long end of the yield curve would push up both the cost of financing and cap rates. It can be challenging to buy now if you expect some price concessions later.

To date, however, cap rates have not moved. The chart below summarizes the levels of cap rates in May relative to the cyclic highs and lows for each sector. The apartment and industrial sectors stood absolutely at the lowest levels relative to historical trends at 5.6% and 6.4%, respectively. Hotel cap rates stood at about their long-run average of 8.6%. Other property types have cap rates that are up slightly from historic lows, but not on the scale of the significant moves in interest rates seen so far in 2018.

1806 USCT preview cap rates-01

There is an expectation in the marketplace that with deal volume down from the highs seen in 2015, prices should follow. Investors looking to buy assets certainly have that expectation, almost a wish, really. But current owners often have little incentive to sell at this point.

On June 20 Real Capital Analytics will publish the new issue of US Capital Trends. This edition reports on May 2018 pricing and deal activity across the property types and examines trends in the single-tenant market.

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.