Slowing price growth could drive cap rates higher

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The price increases that commercial real estate has seen over the past two years are starting to slow, raising the possibility of higher cap rates in the coming months after hitting all-time lows, according to First American Financial. Corporation (FAF) . A just-released FAF model for the first quarter of 2022 predicts that cap rates look “on the verge of rising” as real estate investors look to shift their risk tolerance.

“Since cap (cap) rates are a measure of an asset’s return, higher ‘risk-free’ rates mean that sellers will have to lower their price expectations or increase cash flow, if c is an option, to attract buyers looking for competitive yields, which should also push up cap rates,” said Xander Snyder of FAF. He added that recent interest rate hikes and likely future hikes could impact cap rates, but not as much as house price growth, which he called a more important driver.

Among property types, office and retail assets drove down overall commercial real estate price growth in the first quarter of 2022, while multifamily and industrial properties set records for price growth. Despite this, there is currently a record amount of industrial space in the pipeline across the United States that is expected to come online later this year, which could dampen industrial property price growth and put pressure on the rise in cap rates later in the year. The overall moderation in price growth is something the FAF sees more as a “new normal” rather than a noticeable disruption.

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The prediction is good news for real estate investors, who haven’t had the sunniest outlook for commercial real estate lately. Inflation, which has remained high since it began to soar last year, sent the stock market into its worst first half in 50 years. Add to that the continued uncertainty about what will happen with the office in the future and the ongoing COVID pandemic. Still, office leasing is rebounding in parts of the country, including the Dallas-Fort Worth area, Miami and New York.

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