US cap rates to decline over next six months

Average cap rates could decline in 13 of 30 US commercial real estate markets, according to the latest PricewaterhouseCoopers’ Korpacz report.

The investor survey projected that average cap rates could go down by as much as 100 basis points in nine of those markets by the end of 2010, which would bring average cap rates to as low as 7.4 percent from 8.23 percent.

In at least 17 of the markets covered, average cap rates have started falling during the past three months, as a lack of supply and increasing demand for real estate assets pushes prices higher and cap rates lower.

“While most investors sense that the worst is over in terms of market deterioration, supply greatly outweighs demand across all property sectors, keeping overall vacancy rates high and rental rates on a downward trend,” said director of  PricewaterhouseCoopers’ real estate advisory practice, Susan Smith. “Top-tier locations are showing the most signs of life with respect to tenant interest and recovery potential,” she added.

In the national central business district office market, it is projected that the overall cap rate could go down to 7.15 percent from 8.15 percent, while the overall cap rate in the national apartment market could fall to 6.68 percent from 7.68 percent.

The quarterly report, which questioned approximately 125 investors between April and early June 2010, revealed that despite encouraging economic data for US retail sales, the sector continued to struggle, creating problems for property owners.

Meanwhile, in the office sector, overall vacancy rates were showing some signs of improvement, with the central business district office vacancy slowing significantly over the past year. However, survey participants said they expected a slow rebound for the US office sector.

The apartment sector though was still leading the recovery, the report said, with investment appetite for “high-quality assets in first-tier markets” spurring an uptick in transaction volume.