Q1 2016 cap rates for apartment buildings hit historically low
levels during the first quarter of 2016. The mean cap
rate dropped 40 basis points to 5.6% in Q1. Not only is
this a record low, it’s the first time cap rates for
multifamily have dipped below 6%. The 12-month rolling
cap rate also reached an historic low of 6%. While this
is significant, it’s not unexpected and likely a
consequence of continued low interest rates, not of
irrational exuberance. And while it is difficult to
envision cap rates for apartment buildings continuing to
compress at a rate anything like what we saw in Q1, it’s
not expected that cap rates will increase much in the
near term based on the outlook for apartment building
fundamentals. Therefore, cap rates are likely to remain
in the high-5% to low-6% range over the next year or so.

During the first quarter of 2016 the mean office cap
rate declined by 20 basis points to 6.8%. However, this
is actually up 30 basis points from the first quarter of
2015 when the mean cap rate stood at 6.5%, the
post-recession low. The 12-month rolling cap rate was
virtually unchanged at 6.9% and it has been effectively
flat since the fourth quarter of 2014. So is cap rate
compression over for the office sector? Not likely. The
outlook for office fundamentals is still relatively
optimistic. Office revenue growth should remain healthy
for the next few years.

The mean retail cap rate for retail properties increased
by 60 basis points during the quarter to 7.9%, more or
less the opposite of the apartment sector. Cap rates for
retail haven?t been this high since they were north of
8% in the first half of 2014. 12-month rolling cap rate
was nudged only slightly upward. During the first
quarter the 12-month-rolling cap rate increased by a
small margin and remained at roughly 7.5%. The
12-month-rolling cap rate is 60 basis points below the
historical average 12-month rolling cap rate, indicating
that like most other property classes, pricing is
currently a bit rich. And that?s important context,
certainly in light of the upward cap rate movement this
quarter. Cap rates are still low by historical
standards, especially for high-quality properties. So
the movement up this quarter, while certainly
noteworthy, probably isn?t saying all that much, at
least not yet.