Holy Smoke - - Change in OAR Cap Rates

[Elliott]

In the back of "Valuation" which is AI's quarterly magazine,
they have a section on Korpacz investor survey on discount
and cap rates. I looked at them expecting to see some higher
cap rates.

For the first quarter of 2009, the Office cap rate is 7.14%,
up 38% from the last quarter of 2008 and Apartments are at
5.86%, up 75%! As I recall, you divide those rates into
net income, so that's going to reduce values a lot....and
that's assuming a steady net in a increasing vacancy
rate environment. Ouch! I think I'll stick with residential work.

 

[Michigan CG]

In the back of "Valuation" which is AI's quarterly magazine,
they have a section on Korpacz investor survey on discount
and cap rates. I looked at them expecting to see some higher
cap rates.

For the first quarter of 2009, the Office cap rate is 7.14%,
up 38% from the last quarter of 2008 and Apartments are at
5.86%, up 75%! As I recall, you divide those rates into
net income, so that's going to reduce values a lot....and
that's assuming a steady net in a increasing vacancy
rate environment. Ouch! I think I'll stick with residential work.

Ahhh...grasshopper....you are a little off. Those are basis points.

 

[Restrain]

I always thought it was 10%. That's what it says in the Secret Book.

 

[Terrel L. Shields]

I always thought it was 10%. That's what it says in the Secret Book.

even the SEC requires 10% !

 

[Michigan CG]

9.5% is the new 10%.

 

[JT1974]

It's not just that cap rates are going up, but vacancy rates are increasing and rents are falling in many markets. I think things are going to get a lot worse before they get better.

 

[Michigan CG]

It's not just that cap rates are going up, but vacancy rates are increasing and rents are falling in many markets. I think things are going to get a lot worse before they get better.

I just appraised a retail/office type building. Two of my comps are nice, new brick "professional" office properties. In 2005 they were getting $18/SF NNN. One just got a new tenant at $12/SF, the other has vacant space asking for $12/SF.....will most likely get $10/SF.

That said....I am not seeing cap rates going up very much.....funny market.

 

[Elliott]

TE,
Thank you wise one. I guess those are only basis points.
So I guess a 38 to 75 basis point change is only about a
10% drop in value. Still pretty big though, quarter to quarter.

 

[PL1957]

I just appraised a retail/office type building. Two of my comps are nice, new brick "professional" office properties. In 2005 they were getting $18/SF NNN. One just got a new tenant at $12/SF, the other has vacant space asking for $12/SF.....will most likely get $10/SF.

That said....I am not seeing cap rates going up very much.....funny market.

Believe it or not, Detroit (and SE Michigan) have been relatively stable because they really didn't see the excess capital that drove cap rates down in a lot of markets. CMBS and instritutional lenders wanted no part of SE Michigan even in the go-go days. Increases in cap rates in SE MI are more a function of market fundementals (supply, demand, job loss, etc.) than changes in capital structure.

 

[Riick]

I just appraised a retail/office type building. Two of my comps are nice, new brick "professional" office properties. In 2005 they were getting $18/SF NNN. One just got a new tenant at $12/SF, the other has vacant space asking for $12/SF.....will most likely get $10/SF.

That said....I am not seeing cap rates going up very much.....funny market.

No change in cap rates? What are these "investors" thinking?
You just described a 33% drop in NNN income.
I'm just a foolish guy who owns some 2-4 unit apartment buildings;
but if I were buying commercial property,
and saw longer vacancies combined with declining income,
and read the newspapers, talking about higher real estate taxes......
I'd want the extra safety and increased return of a lower multiple of the income stream.
Again, "What are they thinking?"
======>> BTW, Thus far I've never seen any investors buying in advance of an inflation. Could that be the motivation?, or the low interest rates ??

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