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Cap Rates Peak, But Sales Recovery Delayed Until 2025
CBRE’s latest H1 2024 Cap Rate Survey shows cap rate expansion has reached its peak, but due to ongoing uncertainty, sales volume recovery is expected to be delayed until 2025.
Jordan B. & Han-Gwon Lung
August 02, 2024
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Good morning. CBRE’s latest H1 2024 Cap Rate Survey shows cap rate expansion has reached its peak, but due to ongoing uncertainty, sales volume recovery is expected to be delayed until 2025.
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Market Snapshot
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Investment trends
Cap Rates Peak, But Sales Recovery Delayed Until 2025
Cap rates are close to peaking, hinting at stabilizing conditions in commercial real estate. However, uncertainty will delay sales volume recovery until 2025, according to CBRE's H1 2024 Cap Rate Survey.
Holding steady: During the first half of 2024, Treasury yields fluctuated due to mixed economic signals on inflation and Federal Reserve policies. The 10-Year Treasury yield began the year below 4%, peaked at 4.7% in April, and settled at 4.2% by June. Despite this volatility, the average cap rate remained stable. However, property types diverged: industrial cap rates decreased, while office yields continued to rise.
CBRE / Figure 1: Real Estate Cap Rate and Bond Yields, period average (%)
Expected to stabilize: Most respondents in the latest CRS believe cap rates have peaked, with the majority expecting no change in the next six months. The office sector sees the highest expectation of further devaluations, while opinions on hotels are mixed. The percentage of those anticipating cap rate increases has decreased, likely due to more accommodative signals from the Fed and lower bond yields since October 2023.
CBRE / Figure 2: Share of Respondents Who Think Yields Will Increase During the Next Six Months by CRS Vintage
Office uncertainty: Office property yields have expanded significantly, with cap rates increasing by about 40 basis points in the past six months. Class A offices now have cap rates above 8%, indicating a higher risk premium, while Class C spaces face distressed pricing with cap rates in the low teens. The widening spread between lower and upper cap rate estimates highlights growing uncertainty in office sector pricing.
CBRE / Figure 3: H1 2024 Stabilized Cap Rate Estimates Versus H2 2023 Estimates
➥ THE TAKEAWAY
Why it matters: Cap rate expansion has peaked. However, persistent inflation and high interest rates are delaying sales volume recovery, now expected in 2025. CBRE professionals find capital markets and valuations hard to estimate, especially with unstable prices. The office sector faces the widest bid-ask spread, which should narrow as price discovery progresses.
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✍️ Editor’s Picks
Housing hurdle: The US housing market finally slumped again. June home sales hit their lowest levels since 2007 after prices rose for 11 consecutive months.
Bigger picture: NYC investment sales volume rose 3.2% in Q2 to $5B, driven by retail, multifamily, and distressed office properties.
Real estate rivals: Real estate moguls are heavily backing Trump and Harris in the 2024 presidential campaign, with significant donations from both sides.
🏘️ MULTIFAMILY
Rent revolution: San Francisco bans rent-setting algorithms, which will impact up to 70% of multifamily units. The city aims to lower rents while increasing availability.
Luxury living: Ares Management and Douglaston Development secured a $560M loan for a 60-story luxury Manhattan apartment tower with 938 units.
Rent's due: Cyclone Investment Group risks losing 600 San Antonio apartments purchased for $70.5M, facing foreclosure and a myriad of market challenges.
🏭 Industrial
Acquiring success: CIP Real Estate bought a 143.22 KSF, 92%-leased industrial park in San Jose for $40M and plans up to $750K in upgrades.
Chandler chic: Creation sold the nearly 302 KSF Midway Commerce Center in Chandler, AZ, near Phoenix for $57M to Longpoint Realty Partners.
🏬 RETAIL
Debt dance: Macerich (MAC) nears completion of its $115M refinancing for The Mall of Victor Valley in LA, part of the company’s $2B debt reduction plan.
Gallery goals: Bolour Associates bought an LA site for $6M and plans a gallery, 120-unit apartments near Museum Row, and a new subway stop.
Discount dealmaker: An LA investor acquired 4 Wynwood buildings totaling $12.3M, with potentially $1.8M in cash flow, at a 17% discount.
Urban edge: Urban Edge Properties was pleased with its $66M foreclosure of a Midwood office property in Brooklyn, reducing debt despite declining income and occupancy.
🏢 OFFICE
County cash splash: LA planned a $215M cash offer for the Gas Company Tower, far below its $632M valuation 3 years ago.
Midtown drama: UBS sold a 920 KSF building in NYC for $8.5M on Ten-X, recouping $285M from the previous land sale.
Lifeline loan: San Jose office building owners are seeking a $25M mortgage from Legalist in bankruptcy to avoid an auction, citing pandemic challenges.
🏨 HOSPITALITY
Trophy tower: Host Hotels & Resorts (HST) acquired 1 Hotel Central Park for $265M, a top-10 asset with RevPAR of $545.
📈 CHART OF THE DAY
Of the major U.S. office markets evaluated in this report, the majority exhibited that sky-high leases have outperformed the rest of leasing activity since COVID and in some cases are even yielding higher effective rents for leases closed recently than in the pre-COVID market.
A preference for higher floors by today’s office tenants is just one part of the flight to quality story, but this data shows that is an important part of the trend. When comparing these major cities by the metrics we uncovered the following:
From Q2 2023 to Q1 2024, New York led in sky-high deals among these four markets, with its top five transactions ranging from $187 million to over $1 billion.
The legal and financial industries across all four markets were by far the dominant players in recent sky-high deals and as tenants paying the highest rents in top sky-high buildings.
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