Capitalization Rates Stay Trim
Chicago, Illinois – February 21, 2007 – Climbing mortgage rates sidelined some investors throughout the past year. Such investors waited for more favorable pricing adjustments based on higher rates. However, these investors are now disappointed as equity markets remain strong.
Capitalization rates remain low and occasionally -- particularly hospitality properties -- have dropped further. Generally speaking, conventional income properties are performing well including multifamily, retail, industrial and office buildings.
Historically, most institutional-quality income properties traded within the 8% capitalization rate range. Today’s marketplace features substantially lower cap rates, more like 6.5% or less.
In the foreseeable future capitalization rates are expected to remain stable for the following reasons:
1). Supply & Demand - substantial oversupply of funds in the capital markets. The market is saturated with funds from domestic and international investors, both public and private sector, including pension funds, investment syndicates, 1031 exchange players, REITs and individuals.
2). High Construction Costs - New construction costs have escalated at least 20 to 30%. Existing properties are now more valuable because of prohibitive replacement costs.
3). Ample Market Data - More comprehensive market intelligence is now available. Local, regional and national property data and indices are available for nearly all property types. The information is affordable and available to sophisticated investors as well as neophytes. No longer are sellers and buyers “in the dark” about market activities and pricing parameters. Important decision-making data including occupancy rates, income and expense ratios, reserve requirements, construction costs and financing parameters are readily available on the Internet.
4). Better performance vs. alternative investments - overall yields including cash-on-cash and equity appreciation provide minimum safety nets for investors. Unlike stocks and bonds, investors own brick-and-mortar assets when investing directly.
“Now is a good time as any for prudent real estate investing. While prices remain competitive, opportunities are always available on a case-by-case basis,” notes John Oharenko, a Member of the Advisory Board for the Real Estate Capital Institute.
The Real Estate Capital Institute (www.reci.com) is a research organization dedicated to tracking realty debt/equity markets nationally. The Institute surveys capitalization rates for various income property types. Information spans the previous two decades. Daily mortgage rate information is available via the Real Estate Capital Rateline at 7RE-CAPITAL (773-227-4825).
- Contact Information
- Nat Zvislo
- Research Director
- The Real Estate Capital Institute
- Contact via E-mail
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