The net lease market has witnessed an astounding transformation in the last two years. From May 2022 to May 2024, the total supply of net lease available assets has increased from $9.05 billion to $24.3 billion. That represents a 168% jump in inventory in only 24 months despite average cap rates rising 88 basis points during that same period.
Many participants in the net lease market are overlooking the major storm brewing on the horizon. Despite rising cap rates, inventory levels continue to swell, signaling that cap rates will almost certainly climb much higher to restore market equilibrium. Here, we explore the reasons behind this trend, analyze the underlying data and discuss implications for the future so you can stay ahead of the market.
The Cap Rate Pendulum Swings
Coming off historically hot market conditions in 2021, with cap rates at all-time lows, the market experienced a dramatic shift. Inflation and interest rates quickly skyrocketed, leading to a far higher cost of financing with an ensuing slowdown of buy-side activity. By late 2022, market transaction velocity was plummeting despite a steady influx of assets hitting the marketplace. Sellers have been holding onto “hope certificates” for the past 18 months, anticipating that cooling inflation and potential Federal Reserve interest rate cuts would lure investors back to buying at aggressive cap rates. However, none of that has come to pass, and the supply/demand imbalance has reached its breaking point.
The Current Marketplace in Four Tenants
Market transaction and cap rate data on four specific, highly traded retail net lease tenants provide an incredible snapshot of the broader marketplace dynamics. Chipotle, Starbucks, 7-Eleven and Walgreens are some of the most commonly traded net lease brands, and these tenants provide a fascinating illustration of how the landscape has radically shifted. Over the past two years, cap rates for these tenants have steadily increased, mirroring the overall market shift.
In 2022, the average cap rate for 7-Eleven was 4.51%. By 2023, it had risen to 5.38%. For Chipotle, the average cap rate increased from 4.26% in 2022 to 4.88% in 2023, reaching 5.08% in early 2024. Starbucks saw its cap rate go from 4.75% in 2022 to 5.29% in 2023, and it currently sits at 5.47% in 2024. Walgreens experienced the most dramatic rise, with cap rates moving from 5.60% in 2022 to 6.25% in 2023 and a significant jump to 7.19% in 2024.
These increases in cap rates have been accompanied by a sharp decline in the number of closed transactions. For instance, 7-Eleven saw 148 closed comps in 2022, dropping to 114 in 2023 and just 24 so far in 2024. Similar trends are evident across the other tenants, with Starbucks seeing a drop from 158 closed comps in 2022 to 124 in 2023 and 47 in 2024.
These market conditions and numbers tell a sobering story. Despite cap rates rising substantially over the past two years, on-market inventory has exploded, and transactions have collapsed. This implies that cap rates still have far to go to find market-clearing buyer demand. Let’s look forward and consider how this will play out in the coming months.
The Tipping Point: Motivated Sellers and Accelerating Cap Rates
Within the current on-market inventory, there are both motivated sellers and those with lower eagerness to sell. Motivated sellers, who must make deals due to factors such as loan maturities and financial pressures, make up a large percentage of the market. Therefore, the crux of the pressure within the market lies in the decisions these highly motivated sellers will make and to what extent they will loosen up their pricing. In turn, as the inventory of motivated sellers grows, we can anticipate a notable shift.
As time passes, the urgency for motivated sellers will intensify as loan maturities and financial pressures draw nearer. With a glut of inventory in the marketplace, these sellers will feel compelled to price their assets more aggressively, lowering prices and increasing cap rates to more quickly attract buyer engagement. These highly motivated sellers will have an outsized impact on the market comp data – particularly when transactions are at a relatively low point – setting lower ceiling benchmarks on valuations.
This shift is likely to have a snowball effect. As more sellers observe transactions closing at higher cap rates, fear of further increases will set in. This will drive a sense of urgency, prompting even more motivated sellers to enter the market and accept the new pricing reality. Highly motivated sellers, however, are not the only ones who may want to change their game plan. Conversely, fewer may choose to withdraw their assets from the market and hold onto them if cap rates rise too much. We believe that given the glut of supply of those tenants mentioned earlier, as well as many other household name net lease credit tenants, the result could be a rapid upward adjustment in cap rates, potentially climbing 50 to 75 basis points from current levels through 2024 and well into 2025.
The cycle will then repeat itself as more highly motivated sellers need to transact and “leapfrog” the cap rates from prior sales, until such time the new crop of buyers take notice of the attractive pricing levels in the net lease market and flood in. This process will continue until a happy medium is found where transaction volume consistency and cap rate fluctuation will stabilize in cohesion with one another.
Navigating the New Landscape
For brokers and investors alike, this evolving landscape presents challenges, but where there is a challenge, there is an opportunity. Understanding the motivations behind current inventory levels and anticipating the likely shifts in cap rates can inform strategic decision-making. Sellers who recognize the changing tide and adjust their expectations proactively may find themselves better positioned to navigate the market effectively ahead of time, rather than being forced to react more drastically as the pattern continues.
On the buyer side, the coming months may present unique opportunities. Higher cap rates can translate into more attractive yields, drawing in investors who have been on the sidelines. As the market finds its new equilibrium, savvy buyers will look to capitalize on the evolving conditions, securing desirable assets at favorable pricing.
The current logjam in the net lease marketplace is a complex phenomenon driven by rising cap rates and shifting economic conditions, and the breaking of this logjam will be marked by a period of rapid adjustment. Sellers, driven by necessity, will set new cap rate benchmarks, accelerating the market’s recalibration. While the near-term outlook suggests further upward pressure on cap rates, the market’s ability to adapt will ultimately determine the trajectory. By staying informed and responsive to these dynamics, stakeholders can navigate the challenges and uncover opportunities in this evolving landscape.
Source: GlobeSt.
Regulators Crack Down As CRE Loan Losses Pile Up
U.S. banks are grappling with increasing delinquencies in commercial real estate (CRE) loans, which climbed to 1.4% in Q2. This marks the seventh consecutive rise, driven by high vacancy rates and falling office building values. In response, banks are boosting loss reserves and slowing new loan issuance, with CRE loan growth slowing to 2.2% year-over-year in Q2.
S&P Global forecasts a peak in CRE loan maturities in 2027, with $1.26 trillion expected to come due. For 2024, $950 billion in CRE mortgages are maturing. Federal regulators are permitting loan extensions but are keeping a close watch on banks with high CRE exposure.
Recent M&A activity, such as Bank of America’s $2.9 billion acquisition of Washington Federal Bank’s properties, reflects increased regulatory attention. Despite this, current delinquencies are lower compared to the 2008 financial crisis, thanks to stricter underwriting standards.
The Federal Reserve is likely to cut interest rates soon, but with new CRE loan rates significantly higher than those maturing, the impact may be limited.
Source: SFBJ
The Yield Curve Is Moving Back To Normal. Does It Matter Anymore?
For years, economy watchers have kept an eye on the yield curve. Inversion — when a shorter-term Treasury yield runs higher than a longer-term one, typically the two-year and the 10-year — has long been considered a predictor of recession.
The 10-year and two-year inverted on July 5, 2022, setting a new record. But so far, no recession. This is one correlation whose failure at prognostication would be welcome at the moment.
It’s been showing signs of reverting to normal. The two yields ended August 27, 2024, equal to 3.83%. On the 28th, the 10-year was one basis point above the 2-year, officially being a disinversion, however, on both the 29th and 30th, they were equal again. Then, September 3rd brought the two-year at 3.88%, four basis points above the 10-year’s 3.84%. After, the 10-year over 2-year, was 3.77% over 3.76% on the 4th; 3.73% under 3.75%; on the 5th; and 3.72% over 3.66% on the 6th.
In other words, the state of an inversion or not seems to be in an economic limbo. At this point, what does it all mean?
According to the Financial Times, there are two camps, both looking at the changes as investor expectations of coming interest rate cuts by the Federal Reserve. One says that the end of an inversion is a sign of a coming recession.
James Reilly, an economist at Capital Economics, told the paper that disinversion “has tended to precede recessions in the past . . . this move in yields is a symptom of investors’ worries rather than a new cause for alarm.”
No one knows with certainty the answer because all the factors are correlations that may not be causations. The Federal Reserve Bank of St. Louis’s FRED site has running data, starting June 1976, of the 10-year yield minus the 2-year yield. When the number is positive, the yield curve is normal. When it is negative, there is an inversion. Over that period, the timing between the start of an inversion and the following recession was roughly five months at the short end and 23 months at the long end. The current cycle already far exceeds the longest previous period.
Supposedly the Sahm Rule, which shows a correlation between changes in unemployment and the inception of a recession, says there may be a recession already. Claudia Sahm, the economist for whom the rule is named, has been cautious, having written in July that it “is likely overstating the labor market’s weakening due to unusual shifts in labor supply caused by the pandemic and immigration.”
Perhaps the best approach is to consider the potential impact of rate cuts. There are three meetings of the Federal Open Market Committee left in 2024. Markets have priced in a quarter point in September with a 40% chance of a 50-basis-point cut instead, the FT reports. And they expect just over 100 basis points of cuts by the end of the year. If good economic news continues, the Fed might make three 25-basis-point cuts and December’s meeting is in the middle of the month. There’s a limit to how large the total cut in rates could happen in the immediate future.
Source: GlobeSt.
CRE Delinquencies Accelerate As Industry Waits For Rate Relief
Commercial real estate debt delinquency rates continue to rise with the office sector playing a particularly strong role as its constituents work through bank portfolios, says S&P Global.
The overall delinquency ratio for those loans increased quarter-over-quarter 16-basis points to 1.450%. That came from higher interest rates making refinances more difficult to obtain. The problems are concentrated in the office sector, according to this S&P analysis. However, the firm did say that there is a “sharp decline in medium-term interest rates as Federal Reserve cuts near stands to provide some relief.”
Absent some disastrous surprise in inflation or the labor market, the Fed has already signaled that it will start cutting rates this month. But a sharp decline in any interest rates is far less in focus. Chances are that the September cut to the federal funds rate — the range at which depository institutions will lend to one another overnight without collateral — will be 25 basis points. It might go as high as 50 basis points, but that seems less likely.
When the Fed is done cutting, the total will probably be between 100 and 200 basis points, or somewhere between 3% and 4%. That would be much higher than the relative peak of 2.42% in April 2019. S&P Global recently noted,maturing mortgage rates have been on average 4.3%. Add whatever spread will be in fashion, and some sources have speculated that lenders will trend toward the broader after recent experiences in being caught by inflation — and it may be that wherever Fed rates eventually land, the prevailing CRE interest rates may not be that much more attractive than today.
In conjunction with this, S&P Global noted that the year-over-year growth of bank CRE lending was 2.9% in the first quarter of 2024 and 2.2% in the second quarter. In the third quarter of 2022, it was 12.1%. This shows how much depository institutions have pulled back as well as the degree to which property values have fallen, as the growth in lending is measured in dollars, not in property counts.
The number of banks that exceed 2006 CRE loan concentration guidance has been falling, from 577 in the first quarter of 2023 to 482 in 2024 Q4. The 20 banks with the largest CRE portfolios saw CRE loan totals dropping by a median of 2.1% year over year. There were declines in 12 of them.
It’s been a week of difficult news about long-anticipated waves of CRE mortgage maturities.JLL estimated $1.5 trillion in maturing debt by the end of 2025, roughly 25% of which faces refinancing challenges. About 40% of those properties needing refinancing are multifamily units, meaning that a focus on office as the risky area may not address enough. S&P Global has forecast maturity waves a few yearsout: $946 billion in 2024, $998 billion in 2025, $1.148 trillion in 2026, $1.257 trillion in 2027, and $1.138 trillion in 2028.
While the concept of a maturity wall has been a topic for discussion, it is moving toward a point of practical implications. Such growing pressures mean there is only so long that borrowers can outlast financing costs they can’t afford, and lenders can delay dealing with defaults.
Source: GlobeSt.
Sperry – RJ Realty’s Ron Osborne Reps Buyer In Purchase Of Retail Property In Hallandale
Ron Osborne, Managing Director/Broker of Sperry – RJ Realty, represented the Buyer, a major investor within the Hallandale Blvd. market, in the purchase of a former used-car dealership located at 3901 W. Hallandale Beach Blvd, in West Park, Florida.
The deal closed August 19.
While the property is currently a used car dealership, it is a non-conforming use, and the city will not permit the use in the future.
Sperry – RJ Realty was one of several brokerages vying for the listing, however, the ownership decided to move forward with another brokerage due to a personal relationship.
Within a day of his initial meeting with the Seller, Osborne brought in a contract at 95% of list price of $895,000 with a non-contingent, 30-day closing other than clear and marketable title with the full contract price placed in escrow. The transaction was scheldued to close in less than 30 days, however, the only thing that delayed the closing was the seller’s inability to deliver the property with clean title due to several code violations which needed to be resolved before closing. The Seller was unable to resolve one of the code issues and Osborne was able to persuade his client to purchase the property with the code issue and negotiated a discounted price.
Osborne has represented the investor previously. They own the properties that border the subject property on both sides and have plans to redevelop them.
Osborne has been working the Broward County Market since 1978 and is a top producer in the Sperry Commercial Global Affiliates (SPERRY). When thinking of selling, hire the best broker for the job, not the one that you’re friends with.
The property was listed by Gus Martinez of KW Commercial.
Landlords Face $1.5T Maturity Wall Before 2026
For the last two years, many lenders, brokers, analyst firms, and other experts have warned about a coming CRE debt maturity wave. JLL has seized this wave and estimates that the total due by the end of 2025 is $1.5 trillion and that about a quarter, or $375 billion, will have a hard time refinancing.
The basics have faced the industry for years now. Through the pandemic, two events happened. One, the Federal Reserve pushed an easy monetary policy to increase liquidity, and the federal government pumped rescue money into the economy, both at rates never before seen. Two, inflation quickly rose, as classical economics would suggest, and the Fed boosted interest rates to battle it.
Higher borrowing rates were a shock even though they weren’t out of keeping with historical norms. However, CRE borrowers recently experienced ultra-low rates, as Fed Chair Jerome Powell has described them. The differential was sudden and high. Transactions fell and, as a result, so did the valuations of many properties.
About 40% of the properties that need refinancing are multifamily ones, according to Fortune. Many of the owners financed their purchases using three-year floating-rate loans. It wasn’t an unusual strategy, but many using it frequently missed the addition of a hedge against rising interest rates. They had been relatively low since the aftermath of the Global Financial Crisis and many investors and developers assumed conditions would continue that way.
They got caught. Lower property values and higher interest rates ate up increased rents, undermined net operating income, and reduced the debt service coverage ratio, making the property a bad risk. There’s no telling how much of the 40% of the whole oncoming debt, which is multifamily properties, overlaps with the 25% estimated portion that faces trouble.
Getting that capital injection may be a challenge. Matthew McAuley, research director at JLL, told the news outlet that the funding gap is $200 billion to $400 billion at present.
At the upper end, that is even larger than the estimated amount of total debt that may be in trouble.
Source: GlobeSt.
Net Lease’s Meteoric Rise In Inventory And What It Means For Cap Rates
The net lease market has witnessed an astounding transformation in the last two years. From May 2022 to May 2024, the total supply of net lease available assets has increased from $9.05 billion to $24.3 billion. That represents a 168% jump in inventory in only 24 months despite average cap rates rising 88 basis points during that same period.
Many participants in the net lease market are overlooking the major storm brewing on the horizon. Despite rising cap rates, inventory levels continue to swell, signaling that cap rates will almost certainly climb much higher to restore market equilibrium. Here, we explore the reasons behind this trend, analyze the underlying data and discuss implications for the future so you can stay ahead of the market.
The Cap Rate Pendulum Swings
Coming off historically hot market conditions in 2021, with cap rates at all-time lows, the market experienced a dramatic shift. Inflation and interest rates quickly skyrocketed, leading to a far higher cost of financing with an ensuing slowdown of buy-side activity. By late 2022, market transaction velocity was plummeting despite a steady influx of assets hitting the marketplace. Sellers have been holding onto “hope certificates” for the past 18 months, anticipating that cooling inflation and potential Federal Reserve interest rate cuts would lure investors back to buying at aggressive cap rates. However, none of that has come to pass, and the supply/demand imbalance has reached its breaking point.
The Current Marketplace in Four Tenants
Market transaction and cap rate data on four specific, highly traded retail net lease tenants provide an incredible snapshot of the broader marketplace dynamics. Chipotle, Starbucks, 7-Eleven and Walgreens are some of the most commonly traded net lease brands, and these tenants provide a fascinating illustration of how the landscape has radically shifted. Over the past two years, cap rates for these tenants have steadily increased, mirroring the overall market shift.
In 2022, the average cap rate for 7-Eleven was 4.51%. By 2023, it had risen to 5.38%. For Chipotle, the average cap rate increased from 4.26% in 2022 to 4.88% in 2023, reaching 5.08% in early 2024. Starbucks saw its cap rate go from 4.75% in 2022 to 5.29% in 2023, and it currently sits at 5.47% in 2024. Walgreens experienced the most dramatic rise, with cap rates moving from 5.60% in 2022 to 6.25% in 2023 and a significant jump to 7.19% in 2024.
These increases in cap rates have been accompanied by a sharp decline in the number of closed transactions. For instance, 7-Eleven saw 148 closed comps in 2022, dropping to 114 in 2023 and just 24 so far in 2024. Similar trends are evident across the other tenants, with Starbucks seeing a drop from 158 closed comps in 2022 to 124 in 2023 and 47 in 2024.
These market conditions and numbers tell a sobering story. Despite cap rates rising substantially over the past two years, on-market inventory has exploded, and transactions have collapsed. This implies that cap rates still have far to go to find market-clearing buyer demand. Let’s look forward and consider how this will play out in the coming months.
The Tipping Point: Motivated Sellers and Accelerating Cap Rates
Within the current on-market inventory, there are both motivated sellers and those with lower eagerness to sell. Motivated sellers, who must make deals due to factors such as loan maturities and financial pressures, make up a large percentage of the market. Therefore, the crux of the pressure within the market lies in the decisions these highly motivated sellers will make and to what extent they will loosen up their pricing. In turn, as the inventory of motivated sellers grows, we can anticipate a notable shift.
As time passes, the urgency for motivated sellers will intensify as loan maturities and financial pressures draw nearer. With a glut of inventory in the marketplace, these sellers will feel compelled to price their assets more aggressively, lowering prices and increasing cap rates to more quickly attract buyer engagement. These highly motivated sellers will have an outsized impact on the market comp data – particularly when transactions are at a relatively low point – setting lower ceiling benchmarks on valuations.
This shift is likely to have a snowball effect. As more sellers observe transactions closing at higher cap rates, fear of further increases will set in. This will drive a sense of urgency, prompting even more motivated sellers to enter the market and accept the new pricing reality. Highly motivated sellers, however, are not the only ones who may want to change their game plan. Conversely, fewer may choose to withdraw their assets from the market and hold onto them if cap rates rise too much. We believe that given the glut of supply of those tenants mentioned earlier, as well as many other household name net lease credit tenants, the result could be a rapid upward adjustment in cap rates, potentially climbing 50 to 75 basis points from current levels through 2024 and well into 2025.
The cycle will then repeat itself as more highly motivated sellers need to transact and “leapfrog” the cap rates from prior sales, until such time the new crop of buyers take notice of the attractive pricing levels in the net lease market and flood in. This process will continue until a happy medium is found where transaction volume consistency and cap rate fluctuation will stabilize in cohesion with one another.
Navigating the New Landscape
For brokers and investors alike, this evolving landscape presents challenges, but where there is a challenge, there is an opportunity. Understanding the motivations behind current inventory levels and anticipating the likely shifts in cap rates can inform strategic decision-making. Sellers who recognize the changing tide and adjust their expectations proactively may find themselves better positioned to navigate the market effectively ahead of time, rather than being forced to react more drastically as the pattern continues.
On the buyer side, the coming months may present unique opportunities. Higher cap rates can translate into more attractive yields, drawing in investors who have been on the sidelines. As the market finds its new equilibrium, savvy buyers will look to capitalize on the evolving conditions, securing desirable assets at favorable pricing.
The current logjam in the net lease marketplace is a complex phenomenon driven by rising cap rates and shifting economic conditions, and the breaking of this logjam will be marked by a period of rapid adjustment. Sellers, driven by necessity, will set new cap rate benchmarks, accelerating the market’s recalibration. While the near-term outlook suggests further upward pressure on cap rates, the market’s ability to adapt will ultimately determine the trajectory. By staying informed and responsive to these dynamics, stakeholders can navigate the challenges and uncover opportunities in this evolving landscape.
Source: GlobeSt.
Distress: Not Widespread Yet But On The Rise
The topic of distressed properties as a potential investment target has been prevalent over the past several months, but sales data suggests distress isn’t yet as widespread as many think.
According to an analysis by Colliers director of research for U.S. Capital Markets Aaron Jodka, distress sales have averaged $2.1 billion per quarter since the beginning of 2023. This is below the quarterly average of $2.2 billion from 2017 to 2019 and is much lower than the amount that occurred during the Global Financial Crisis of 2008.
Hospitality was the asset class most impacted by distress activity at 7.2% of total sales. Office ranks second at 3.8%. The industrial sector has shown minimal with only $1.7 billion outstanding, compared with $41 billion outstanding in the office sector for the second quarter.
Distress is a viable investment target, with numerous properties selling at steep discounts to their previous sale price and well below replacement costs, said Jodka. He encouraged investors to remain vigilant as the potential for distress opportunities remains across all asset classes.
According to MSCI, multifamily has the highest share of potential distress at nearly $71 billion, followed by office at $67 billion, as well as retail, hospitality and industrial totaling between $32 billion and $36 billion.
The top five markets in terms of distress are Manhattan with $17.2 billion currently in distress, San Francisco and Chicago both with $7.2 billion each, Los Angeles with $4.4 billion and the New York City boroughs with $3.7 billion, the analysis said.
Understanding where distress is today and where it will emerge in the future will be crucial in helping investors unlock acquisition targets, he added.
Source: GlobeSt.
In A Switch, Large Property Sales Outperform Smaller Deals
There’s evidence of some reversal in a pattern of property sales based on size from the middle of 2023.
Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it was a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.
In a new Real Estate Alert, Green Street wrote that in the first half of 2024, small property sales growth didn’t hold up as well as large institutional offerings. From January to June, properties in the $5 million to $25 million range fell 10.7% from $44.32 billion in the first half of 2023 to $39.58 billion in the first half of this year, according to the firm’s sales comps database.
Compare that to properties in the $25 million and higher category, where sales activity was down only by 8.6%. It’s the first time since the full year of 2021 that larger properties outperformed the less expensive category.
Green Street said there were a few reasons for the reversal: fewer distressed deals in the small-property space, increased focus by private investors buying more expensive properties while institutions wait out volatility and two giant apartment trades.
Kevin Aussef, president of investment properties in the Americas for CBRE, told Green Street that one reason for the lack of activity among smaller properties is less distress. Many private clients weren’t typically late-cycle buyers and they weren’t typically leveraged with mezzanine debt.
Or maybe there might have been greater opportunities for distressed purchases among larger properties. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.
Source: GlobeSt.
Office Leads Higher CMBS Special Servicing
The CMBS special servicing rate is continuing to creep higher. In July, it was up month-over-month, by seven basis points to reach 8.30%, according to Trepp.
This year, special servicing started at 6.95% and has grown every month, meaning an additional 135 basis points since January 1, 2024, and 168 year-over-year. The rate is at a three-year high and is currently 350 basis points above the July 2022 level. The seven-basis movement is small – but the cumulative shift is significant.
Special servicing rates vary by property type. Currently, office is at the top with the July 2024 special servicing rate of 11.25%, up from 7.33% a year ago. The next highest was retail at 10.89%, only two basis points above the 10.87% rate the prior year. Then mixed-use went from 6.89% in July 2023 to 8.93% in July 2024. Lodging was 7.06% in 2023 and 7.33% in 2024. Multifamily saw a more appreciable absolute gain to 5.11% from 3.26%. The smallest level of special servicing was industrial’s increase from 0.31% to 0.40%. The change between June and July 2024 was industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+46 basis points); mixed-use (-41 basis points); and retail (+7 basis points).
As usual, type 2 CMBS loans were in much better shape than type 1. The distribution of the former, from July 2023 to July 2024, was industrial (0.20% to 0.30%); lodging (6.95% to 7.27%); multifamily (3.26% to 5.11%); office (7.06% to 11.21%); mixed-use (6.99% to 9.12%); and retail (10.26% to 10.35%). For the June to July move, the amounts were industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+47 basis points); mixed-use (-41 basis points); and retail (+12 basis points).
For type 1, the year-over-year changes were industrial (69.35% to 84.11%); lodging (35.13% to 24.94%); multifamily (0.00% to 11.76%); office (41.07% to 17.91%); and retail (66.22% to 93.68%). Month-over-month changes were industrial (+99 basis points); lodging (+16 basis points); multifamily (-7 basis points); office (-25 basis points); and retail (-40 basis points).
The rates could have been worse. According to Trepp, new transfers joining special servicing were on the “lighter side,” just under $1.9 billion. The two largest loans entering special servicing were the $400 million Bank of America Plaza loan because of imminent maturity default and the $233 million Aspiria Office Campus loan because of an imminent balloon payment default before an August maturity date.
Source: GlobeSt.
Have Cap Rates Peaked?
Cap rate expansion may have very well peaked, but uncertainty will delay sales volume recovery until 2025, according to CBRE’s cap rates survey for the first half of the year.
Ultimately, continued disinflation and expectations for a Fed rate cut held the 10-year Treasury yield to 4.2 percent as of June.
More than 250 CBRE real estate professionals completed the survey with their real-time market estimates between May and June. The report captured 3,600 cap rate estimates across more than 50 geographic markets to generate key insights.
Every one of CBRE’s reports in the series asked respondents to estimate the direction of cap rates and the magnitude of the expected change during the next six months. This quarter, the most common response across all categories was “no change.” Fewer respondents believe cap rates will increase during the next six months compared to the previous two publications.
The share of respondents expecting further devaluations was highest within the office sector, reflecting the uncertainty around market fundamentals.
Buyers coming off the sidelines
Doug Ressler, manager of business intelligence at Yardi Matrix, told Commercial Property Executive that it appears that cap rates have indeed peaked but ongoing uncertainty is expected to delay sales volume recovery until 2025.
Peaking will differ by market and property type, Ryan Severino, chief economist at BGO, told CPE.
Matthew Lawton, executive managing director at JLL, mentioned cap rates peaked in the second quarter and have a downward trend based on some recent transactions, including the KKR portfolio acquisition and other recent one-off transactions in the multifamily space.
Equilibrium must avoid negative leverage
Recent data suggests there is uncertainty in office cap rates in some major markets, according to Jeff Holzmann, COO at RREAF Holdings.
Neil Schimmel, Investors Management Group founder & CEO, noted that with inflation and debt pricing falling, cap rates are poised to follow suit.
Source: CPE