Now that we are in the middle of the third financial quarter of 2019, it’s time to look at what changes cap rates have undergone since the final quarter of 2018. Last year saw stagnant cap rates and a tendency toward caution when it came to commercial real estate transactions writ large. Interest rate fluctuations and a U.S. government shutdown were just two of the many factors investors took into consideration when choosing to buy or sell commercial real estate properties. Now that investor confidence and optimism are beginning to rise, the commercial real estate market should see steady cap rate trends in most areas, although some segments of the market could experience fluctuations.
Changes by The Federal Reserve
Although the job growth market is continuing to drive the U.S. economy, the Federal Reserve recently cut its policy rate by a quarter of a percentage point, marking the first time that the central bank has lowered interest rates in more than a decade. What does this mean for the commercial real estate industry? Probably nothing. According to many industry experts and reports, this interest rate cut is unlikely to change or boost commercial real estate values in any appreciable way. Since the end of 2018, there has been a noticeable decline in financing rates. Despite that decline, cap rates for commercial real estate properties throughout the nation have remained stable. Although increasing access to capital is always a positive, there is no research to support that this access will translate into a surge in transaction activity.
Commercial Real Estate Forecast
The first few months of 2019 brought about another round of corporate bankruptcies and store closings. Companies like Toys ‘R’ Us, Payless ShoeSource, Shopko, Dressbarn and even Pizza Hut have all been selling off property and leases. However, store closures and bankruptcies have been impacting the commercial real estate industry for some years now. Retail cap rates climbed significantly throughout 2017 and 2018, often rising above 7.9 percent. Most of these cap rate increases were driven by Class B and C retail, while Class A commercial real estate yields have stabilized in some markets thanks to well-placed assets with strong, credit-rated tenants and high rental rates. Cap rates for properties like destination mixed-use projects and freestanding buildings with nationally recognized tenants should fare well, although older properties with vacancies will pose their own unique challenges.
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