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January 22, 2018

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Question Topic: Cap Rate Trends. What is your outlook for cap rates? How will they play out over the next several years and where will we be when things settle down?

DrD's Answer

Those are the leading questions on real estate professionals' minds and, unfortunately, one for which there is no clear answer. That said, it is useful to try to frame a general response and point out some of the signals that should be watched. I'll take a stab at both elements of your quesiton: market cycles and market timing, and cap rate trends.

JRD Poll



Respondents were asked to indicate where they saw current cap rates for institutional grade properties and for distressed assets.  The same question was asked about where cap rates would be in a year and in three years. As noted, current Cap rates for core assets was around 8.5%, while distressed was around 12% plus. It should be noted these cap rates are for in-place income, so distressed assets with a high current vacancy would actually be at a much higher implicit cap rate relative to a normalized vacancy level. Respondents didn’t see much change one year out and a slight decline to 8% in three years for core and 10% for distressed. The core rate is around long-term averages but a long way from the 5-6% rates of the recent bull market. The decline in distressed rates suggest they believe the market will experience some recovery in 3 years.


Illustration 2: Real Estate Cap Rates

Cap Rate Forecasts


Illustration 3: Key Indicators to Watch

Leading Economic Indicators to Watch


For back-up data and more detailed commentary, see my Annotated NAIOP Forum Presentation: We Ain't There Yet, and Their Ain't No Net. For a more Seattle-specific version of this discussion, see: Annotated WASCAR Presentation: To Walk, To Talk, or to Walk the Talk. Gool luck in navigating these troubled waters.


Category: Market Conditions

Question #: 111 Real Estate Outlook 2010

Updated: Novermber 1, 2009


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