Commercial real estate services company CBRE conducted a survey of industry professionals in 2H 2022.

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This CBRE report focuses on one particular metric that is often used in the commercial real estate industry: Cap rate.

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A property’s cap rate is its annual net operating income divided by its market value. This gives a simple picture of how many years of operating income are required to pay off the full value of a property.

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Low cap rates are very attractive for buyers and CBRE’s survey shows that the industry expects cap rates to continue rising for a while longer – an indicator that fewer buyers are bidding on properties.

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This makes sense given current macro conditions. A rapid rise in interest rates makes financing purchases more expensive, which discourages buyers.

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Fewer buyers means downward pressure on asset prices. But property owners dislike selling for less than they paid for a property. It can take some time for sellers to recalibrate their expectations. We’re seeing exactly that phenomenon right now, with bid/ask spreads widening.

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As the report indicates, we’re in a new period of price discovery.

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While the CBRE survey shows wider spreads, fewer transactions, and higher cap rates more broadly, not every sector is being affected equally.

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As we have discussed in recent newsletters, the Medical Office Building (MOB) sector has performed substantially better than other types of commercial real estate.

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Alliance’s specialization in MOB continues to help us outperform, regardless of market conditions.

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We have a variety of ways we add value. Our ability to manage complex or difficult deals, address vacancy risk in the case of a short lease, and handle other situations that scare off less sophisticated buyers gives us a big advantage.

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And of course, our deep expertise in the highly resilient MOB sector positions us well to thrive, regardless of lending conditions or cap rates.

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There are always opportunities out there and we’re going to find them.

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