WIDENING SPREADS AND CAP RATES
May 31, 2023
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Commercial real estate services company CBRE conducted a survey of industry professionals in 2H 2022.
This CBRE report focuses on one particular metric that is often used in the commercial real estate industry: Cap rate.
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.
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.
This makes sense given current macro conditions. A rapid rise in interest rates makes financing purchases more expensive, which discourages buyers.
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.
As the report indicates, we’re in a new period of price discovery.
While the CBRE survey shows wider spreads, fewer transactions, and higher cap rates more broadly, not every sector is being affected equally.
As we have discussed in recent newsletters, the Medical Office Building (MOB) sector has performed substantially better than other types of commercial real estate.
Alliance’s specialization in MOB continues to help us outperform, regardless of market conditions.
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.
And of course, our deep expertise in the highly resilient MOB sector positions us well to thrive, regardless of lending conditions or cap rates.
There are always opportunities out there and we’re going to find them.
