Capitalization rate is down to record low but investors in commercial property are unfazed.
One crucial indicator of how properties are valued is the capitalization or cap rate which has sunk to all-time lows in recent years. According to Institutional Investor, to compute the cap rate of a property, its annual income should be divided by its purchase price. It is a common indication that when the market is hot, the cap rate goes down. Normally, this should be an alarming development but with interest rates nearing zero, experts and investors are not worried about the current cap rate status.
In the same report by Institutional Investor, as of Sept.1, the cap rate average for all types of U.S. property was recorded at 5.25 percent. The lowest recorded cap rate prior to this finding was in 2007 when it went down to 5.65 percent. It has even fallen down to 3 percent for top shelf properties in in-demand markets according to Andrew McCulloch, the managing director of real estate analytics for Green Street. McCulloch said, "There's just a tremendous amount of capital looking for a home in real estate."
However, the high valuation is proving to be a challenge to wealthy investors. Alex Foster, co-founder and managing principal of Atlas Real Estate Partners in New York said, "The feeling is that things are pricey, and there aren't a lot of deals out there."
In the meantime, Urban Land reported that a survey called "ULI Real Estate Consensus Forecast" says that there will be a slow growth due to the unstable state of global markets which made investors less aggressive compared to six months ago. But survey respondents still say that they expect three more years of positive US real estate growth and no sudden crashes. 48 real estate economists took part in the survey conducted in August and September of this year.
