According to Real Capital Analytics preliminary data shows U.S. cap rates were flat-to-down in the third quarter of 2018 despite eight Federal Reserve interest rate increases since the end of 2015. Investors have been anticipating cap rate increases for some time now almost hoping for increases in some cases- it hasn’t happened yet. In DFW we have experienced higher prices for B&C Class Multifamily as rents have continued to increase and investor expected returns have decreased. Nationally, deal volume for the apartment sector climbed again in August and is on pace to hit the record high annual volume of $159.1 billion seen back in 2016. Growth for apartment property prices in August continued to outpace that for commercial property overall.
Source: Real Capital Analytics
Cap rates for the hotel, apartment, and industrial properties were down from a year earlier, though only approximately 10 to 20 bps. For the industrial sector, the trend through 2018 has been flat, as most of the drop was in late 2017.
The only property sector that has exhibited a measurable increase in cap rates is the retail sector. Cap rates for retail properties averaged 6.5% in Q3’18, though we’re closer to the 6.4% range in 2016.
Cap rates have been steady this year despite the increases in the target range of the fed funds rate; changes in the long end of the yield curve matter more for real estate pricing. Since Q1’18 the 10yr UST operated in the 2.8% to 3.1% range. With that stability cap rates held consistently and deal volume grew slightly.
The 10yr UST jump past the 3.2% range in October has investors on edge again. Is it finally time? Will cap rates finally adjust upward in a meaningful way? Current trends in the multifamily sector do not point to any movement in Cap rates in the near term, sales volume may adjust before pricing assumptions.
If Q4’18 follows the patterns set earlier in the year then commercial sales volume for 2018 could potentially be 10% higher than in 2017. However, with the recent shift in the 10yr UST the forces driving investment activity may change.
In a higher interest rate environment, buyers may return to a sense of caution and desire price adjustments before jumping into new investments. Owners of properties will be hesitant to accept higher cap rates when they look back at comparable properties that have sold over the last few quarters. In combination, buyers and sellers may move further apart on price expectations.
We have recently achieved the highest price per unit for a 1980’s construction property in Dallas. If we can be of assistance with an opinion of value for your multifamily property please contact us at Todd.Franks@svn.com or 972-916-9397.