Cap Rates Approach Peak Levels Despite Tighter Lending Standards and Potential Distress, CBRE Survey Finds
Retail and Multifamily Cap Rates Show Smallest Increases, While Office Sector Sees Largest Jump
CBCBRE’s latest survey reveals that cap rates in the commercial real estate market are nearing their peak levels, signaling stabilizing conditions on the horizon, despite challenges posed by tighter lending standards and potential market distress.
The survey, which closely tracks pricing trends for major property types in the U.S., highlights the impact of rising bond yields in the second half of last year, leading to accelerated cap rate expansion across various property sectors. However, there are indications from the survey and broader capital markets activity that yields may soon be peaking.
“Amid tighter lending standards, the commercial real estate market has shown resilience. 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,” said Tom Edwards, Global President of Valuation & Advisory Services for CBRE.
Capitalization rates—often referred to as cap rates—measure property returns by dividing the annual income by the sale price. A lower cap rate generally indicates a higher value. CBRE’s survey, which examined investment sentiment on market conditions and capitalization rates for stabilized properties, revealed several key findings:
- The average cap rate increased from 6.4% to 7% in H2 2023, with expansion across multiple property types.
- Most respondents believe that cap rates have already reached their peak, with no significant changes anticipated in the next six months.
- Class C office properties in CBDs experienced the largest cap rate increase, with an average rise of over 100 basis points (bps), while suburban cap rate expansion was generally limited to less than 50 bps.
- Multifamily cap rates have been rising at a faster pace in certain cities, such as Charlotte and Orlando, where market conditions are weakening.
- Neighborhood retail cap rates demonstrated the highest stability among all property types.
Notes to editors
CBRE’s U.S. Cap Rate Survey was conducted from mid-November through December 2023 and informed by deals that occurred throughout the second half of 2023. While market conditions are fluid, the CRS provides a useful baseline and sheds light on how investor sentiment is evolving. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. More than 250 CBRE real estate professionals completed the H2 2023 CRS with their real-time market estimates in late 2023. Given the current rapidly changing investment landscape, estimates may not reflect recent events or the most current market conditions. Readers should view all cap rate estimates within this context.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2023 revenue). The company has more than 130,000 employees (including Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.