By Jim Costello 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.
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.