The Roaring 20s: What 2020 Has in Store for Cap Rates
There are no clear ranges for a good or bad cap rate. However, cap rates should always be taken into account when assessing the potential of a commercial property.
Cap rates can give you valuable insight into the rate of return on a CRE investment and show what the income potential of a property is in relation to its cost, or current market value.
Cap rates are subject to fluctuation and it is important for CRE investors to gain a basic insight into cap rate trends as well as what underpins these.
So, what is in store for your local cap rate coming into the roaring 20s? Read on to find out.
Changes in Investor Demand
Cap rates, or capitalization rates, are influenced by a number of factors. One of these is changes in investor demand.
As demand rises, cap rates fall. This is because from higher demand comes higher CRE prices.
Capitalization rates are worked out by dividing the total net operating income of a property by its market value. The higher a property’s market value, the lower its cap rate will be.
Analysis by Deloitte states that US investors were increasing focus toward commercial real estate during this past period. Assuming that this trend will continue, this could influence cap rates to decline marginally, which would assist to keep them stable against other factors.
Additionally, further reports state that our current cap rates pose an attraction to international CRE investors. As more international investment enters the market, this could play a role in increasing commercial property values in some areas.
As the cap rate formula has two variables, inversely, rental rates can also influence cap rates. This is likely to be localized and unique to certain areas and sectors.
Lending Rate Fluctuations
Fluctuations in lending rates are another factor that influences cape rates. When interest rates rise, these additional financing costs affect the cost of properties, which in turn influences the cap rate formula.
A higher property cost correlates to a lower cap rate. However, prolonged high interest rates also have a stifling effect on the market, due to financing constrictions. Over time, this can also reduce the demand for properties in certain instances.
Currently, interest rates are low, and it is forecasted that they will remain this way or drop further.
Perceived Risk Factors in the Commercial Property market
Cap rates are used to indicate the risk level associated with a CRE property, with high cap rates indicating higher risk rates, and low cap rates promising lower risk profiles.
However, perceived risk can also influence cap rates themselves. Perceived risk is a factor that can influence the value of properties on the market. Higher levels of perceived risk can cause price drops.
Price drops in turn can raise cap rates.
The CAP Rate Outlook for 2020
As cap rates are determined by several inter-playing factors, it is not possible to minutely predict their movement into the future with full accuracy, especially over the CRE market as a whole.
If you would like to gain expert advice on commercial real estate in Boston, we specialize in helping investors find and manage favorable local CRE investments. We provide hands-on insight and assistance in all areas of CRE brokerage.
Schedule a free consultation today.