CBRE: Apartment going-in cap rate expansion slowing (2024)

FAQs

What is the cap rate for CBRE 2023? ›

In Q1 2023, the average going-in cap rate, which is based on the first year of net operating income at the property purchase price, increased 23 basis points to 4.72%, “marking the first significant quarterly deceleration in cap rate expansion since the Fed began its latest round of rate hikes,” according to CBRE.

The interrelationship of NOI, cap rate and property value means that a property's value can be determined using the NOI and the cap rate — property value equals the NOI divided by the cap rate. A higher cap rate will therefore result in a lower property value, NOI being equal.

Most notably, CBRE forecasts that the federal funds rate likely will exceed 5% in 2023, falling to about 2% by 2025. In short, we believe that both interest rate hikes and cap rate expansion will peak later this year and should decrease in 2024.

A 7.5 cap rate means that you can expect a 7.5% annual gross income on the value of your property or investment. If your property's value is $150,000, a 7.5 cap rate will mean a yearly return of $11,250.

Generally, the higher the cap rate, the higher the risk and return. Market analysts say an ideal cap rate is between five and 10 percent; the exact number will depend on the property type and location.

Based on 42 current employees, 57% said they receive an annual bonus at CBRE.

It represents the expected annual rate of return if the property was purchased with cash. Cap rate expansion – higher cap rates- happens when market conditions are poor or uncertain and generally leads to falling property prices. Cap rate compression – lower cap rates – is the opposite.

It indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk. On the other hand, a higher value of cap rate implies relatively lower prospects of return on property investment, and hence a higher level of risk.

What's a good cap rate? It varies from investor to investor and property to property. In general, the higher the cap rate, the greater the risk and return.

CBRE Group has received a consensus rating of Buy.

What is the outlook for cap rates? ›

With interest rates expected to peak later this year, the end of cap rate expansion may be in sight for most asset types. CBRE forecasts that the federal funds rate will likely exceed 5% in 2023, falling to about 2% by 2025.

The going-in cap rate is the property's projected first-year NOI divided by the purchase price of the property. If the terminal capitalization rate is lower than the going-in rate, it usually means that the property investment was profitable.

However, aside from large funds and institutional investors willing to park capital at low 4% to 8% cap rates, most frontline individual investors and real estate pros are seeking opportunities that can offer 10% to 20% cap rates.

In real estate, a low (less than 5%) cap rate often reflects a lower risk profile, whereas a higher cap rate (greater than 7%) is often considered a riskier investment. Whether an investor deems a cap rate “good” is a direct reflection of whether or not they think the investment's return matches to the perceived risk.

This is because the formula itself puts net operating income in relation to the initial purchase price. Investors hoping for deals with a lower purchase price may, therefore, want a high cap rate. Following this logic, a cap rate between four and ten percent may be considered a “good” investment.

It's generally better to have a lower cap rate than a higher one. A lower cap rate implies that the property is more valuable and less risky due to type, class, and market. While a higher cap rate offers investors a higher return, that property investment typically has a higher risk profile.

Despite strong real estate fundamentals, higher borrowing costs and uncertainty around monetary policy are forcing cap rates upward. In some instances, industrial and multifamily cap rates are below current borrowing costs.

The most recent RealPage and Yardi forecasts for 2023 indicate rent growth of 2.6% to 2.9%, whereas they were between 3.1% to 3.6% during the third quarter of 2022.

401(k) employer match at 66.67% of your contribution, for a total of 4% match on up to $150,000 of your eligible pay.

Yearly, 3%.

Does CBRE have unlimited PTO? ›

The Highly Compensated Employee PTO program offers unlimited PTO.

Higher borrowing costs

This is because the higher the cost of borrowing (brought upon by higher interest rates), the smaller the debt an income-generating property can service. This, logically, leads to a fall in property prices which increases cap rates.

Cap rate compression occurs when cap rates decline which, as valuations rise, which is a positive for REPE investors. In short, falling cap rates imply rising prices for a stream of income, an ideal scenario for commercial real estate investors, because it results in price appreciation and higher total returns.

If the cap rate is greater than the interest rate, you'll generally come out ahead. If the cap rate is lower than the interest rate, you'll be relying on appreciation for your return, making it a riskier speculative investment.

Using market-adjusted cap rates to classify individual properties, they find evidence of a strong value effect in real estate: High-cap-rate properties exhibit higher returns, outperform on a risk-adjusted basis, and should be preferred by investors.

At face value, inflation can increase cap rates, thus driving down commercial real estate valuations. But, inflation also tends to drive NOI higher, which can have an offsetting effect on these decreased valuations.

To summarize: high cap rates are great, but they can also point towards factors that increase the risk of an investment. A property with an 18% cap rate might need work, and might not be in a highly desirable area. Ask yourself, “Is this amazingly high cap rate stemming from high NOI, or low property value?”

Buyers usually want a high cap rate, or the purchase price is low compared to the NOI. But, as stated above, a higher cap rate usually means higher risk and a lower cap rate usually means lower risk.

A: It depends on the investor, the local market, and your expectations of future value appreciation. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.

Who is CBRE biggest competitor? ›

CBRE Group's competitors and similar companies include Mitie, JLL, Savills and Colliers International. CBRE Group is a real estate services and investment company.

CBRE led the real estate sector on eight of the nine key performance attributes—financial soundness, global competitiveness, long-term investment, management quality, people management, service quality, use of corporate assets and social responsibility.

Salaries at CBRE Group range from an average of $54,599 to $135,353 a year. CBRE Group employees with the job title Project Management Director make the most with an average annual salary of $142,376, while employees with the title Client Services Coordinator make the least with an average annual salary of $51,867.

Capitalization rates are often used to reflect the risk of an individual investment from a market stand point. The lower the cap rate, the lower the perceived risk of a particular investment is and thus the higher the cost of the asset.

Average cap rates range from 4% to 10%. Generally, the higher the cap rate, the higher the risk. A cap rate above 7% may be perceived as a riskier investment, whereas a cap rate below 5% may be seen as a safer bet. If a property has a 10% cap rate, you should expect to recover your investment in about 10 years.

The same formula can be used to calculate the purchase price if you have the Cap rate and NOI. To solve for the price, just rearrange the original formula to: Purchase Price = NOI / Cap Rate.

Every year, as you finalize your building's annual net operating income, your cap rate calculations should change. Rent will change based on your lease terms and if there is any vacancy.

The cap rate of a property is determined based on the potential revenue and the risk level as compared to other properties. Importantly, the cap rate will not provide a total return on investment. Instead, it will indicate an estimate of how long it will take to recover the initial investment in the property.

For example, a 10% cap rate is the same as a 10-multiple. An investor who pays $10 million for a building at a 10% cap rate would expect to generate $1 million of net operating income from that property each year.

Net lease capitalization rate (which is popularly shortened to simply, net lease cap rate) is a calculation used to measure the expected investment return on a net lease property investment.

Is 12 percent cap rate good? ›

A good cap rate can be anything between 4%-12%. If you are in a location with high demand and high costs like New York City or Los Angeles 4% may be considered a good cap rate. A lower-demand area like an area that is developing or a rural neighborhood might see average cap rates of 10 percent or higher.

Generally, a cap rate of 8-10% is considered a good cap rate for a rental property, however, cap rates can vary significantly depending on the market and the type of property. For example, a cap rate of 6-7% may be considered good for a multifamily property in a high-demand market.

Historically, a good cap rate for multifamily is over 4% and could be as high as 10%. That range comes down to the fact that several factors can influence a good cap rate and possibly make a low cap rate look better or a good one look worse than it is. Interest rates are an important factor in assessing cap rates.

This is a general rule of thumb that determines a base level of rental income a rental property should generate. Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price.

Despite suppressed transaction volume, only registering 31 transactions in Q1 2023 vs. 70 in Q4 2022, cap rates have remained relatively unaffected, only increasing three basis points in the same time frame, landing at 5.09% vs. 5.06% in the prior quarter.

According to First National Realty Partners, average cap rates by property class are: Class A: 4-8% Class B: 6-9% Class C: 7-10%

With interest rates expected to peak later this year, the end of cap rate expansion may be in sight for most asset types. CBRE forecasts that the federal funds rate will likely exceed 5% in 2023, falling to about 2% by 2025.

1) Interest-rate forecast.

We project a year-end 2023 federal-funds rate of 4.75%, falling below 2.00% by mid-2025. That will help drive the 10-year Treasury yield down to 2.25% in 2025 from an average of 3.5% in 2023. We expect the 30-year mortgage rate to fall from an average 6.25% in 2025 to 4% in 2025.

The Fed could hint at a pause

When Fed policymakers released their economic estimates in March, they expected to raise interest rates to a range of 5 to 5.25 percent in 2023.

A higher cap rate indicates that the expected returns from a property are riskier, and real estate investors will pay less for such property. A lower cap rate represents a less risky property, and an investor will be more willing to pay above the property value to receive a lower yield.

Does a lower cap rate mean higher value? ›

Cap rates generally have an inverse relationship to the property value. The lower the cap rate, the higher the purchase price and vice versa. Using a cap rate to value commercial real estate is similar to how investors use multiples when valuing stocks or other equities. The concepts are essentially identical.

Let's say, for example, another project returns the same NOI of $50,000 per year on a $500k investment. That's a cap rate of 10%. But, if they say the property will sell for double what it is now, that winds up being a reversion cap rate of 5% ($50,000 / $1 million = 0.05 * 100% = 5%).

Generally, a high capitalization rate will indicate a higher level of risk, while a lower capitalization rate indicates lower returns but lower risk. That said, many analysts consider a "good" cap rate to be around 5% to 10%, while a 4% cap rate indicates lower risk but a longer timeline to recoup an investment.