We are frequently asked: “what’s happening with the market?” and “where are cap rates going?” We’re still in the midst of the pandemic and we expect to continue seeing the effects for several months/quarters, so it is difficult to predict. However, we wanted to provide an update with the latest data.
A quick overview for those that are unfamiliar, the cap rate - short for capitalization rate - is a quick and easy way of gauging investment opportunities. Essentially, it is calculated by dividing the annual net operating income by the purchase price. (It is a little more complicated than that, so please reach out to us if you would like to have a better understanding.)
The lower the cap rate, the more investors value the asset – a lower cap rate means that investors are willing to pay a higher price/accept a lower rate of return to own it.
Source: Based on data compiled from CoStar on 9/29/2020
In Boston, investors’ order of preference is projected to remain the same as it has for the past several years: Multifamily, Office, Retail then Industrial. As the chart illustrates, cap rates for multifamily properties have been substantially lower than the other property types – Boston multifamilies remain highly sought-after by local, national and international investors.
Due to the pandemic, many are predicting cap rates to increase over the next few quarters for all property types, followed by a return to pre-pandemic levels. The projections depicted in the chart are always subject to change – they are provided by CoStar, one of the main commercial real estate databases.
Based on what we are seeing/hearing though, it is surprising that the retail and office markets are projected to follow similar paths. Retail vacancies seem to be spiking more quickly and severely than office vacancies, as we seem to see another business close each day. On the office side though, even if a company is in “work from home” mode and not in the office, they are likely still paying their rent – accordingly, the vacancy rate for office space is likely to increase more slowly, as companies’ office leases expire and they choose not to renew or to decrease the size of their space.
The projected path of industrial property is also surprising. While things have been shut down, there has been a substantial increase in online/website ordering. If sales are not happening in retail stores, grocery stores, shopping malls, etc., then there will likely be an increased demand for industrial space so that businesses can store inventory and fulfill orders. Accordingly, cap rates for industrial space may not see the sharp increase that is projected - industrial space is seeing greater demand and its an asset that investors are becoming increasingly interested in.
For investors looking for opportunities to capitalize on current market conditions, it is prime time to set up a search plan. Over the next several months, there are likely to tremendous deals – the key is to have an organized search in place so that you hear about the opportunities as soon as they become available.
For owners that want/need to sell, it would be best to bring your property to market as soon as possible, since many are projecting that cap rates will continue rising for several quarters (meaning lower sale prices). We have closed deals in the midst of the pandemic and are happy to offer a free consultation to discuss a proposed marketing strategy.