Cap Rates May Be On The Road To Stabilization, Investors Say

Although economic headwinds are still blowing, investors are optimistic that capitalization rates have reached their peak and will stabilize soon.

Bond yields peaked at 5% in October before receding below 4% near the end of 2023, according to CBRE`s second-half cap rate survey. And with yields at higher rates, the average cap rate increased from 6.4% to 7% in the second half of 2023.

But survey respondents anticipate that cap rates are close to hitting their peak, with yields expected to decline and the Federal Reserve poised to begin interest rate cuts sometime this year.

“Amid tighter lending standards, the commercial real estate market has shown resilience,” Tom Edwards, CBRE global president of valuation and advisory services, said in a statement.

“Cap rates may be reaching their peak, driven by lower bond yields and the expectation that the Fed has concluded its rate-hiking cycle. By adapting strategies, investors can capitalize on stabilizing market conditions and position themselves to generate favorable risk-adjusted returns.”

The survey looks at 3,600 cap rates across 50 markets and incorporates responses from more than 250 CBRE real estate professionals...

   ...more

RSK: Cap rates depend on which side of the transaction you are on...buyer or seller. But an average tells you what investors are willing to pay and sellers willing to accept.