Houston Office Cap Rates Remain Static

by CoyDavidson on September 17, 2010

The latest Korpacz investment survey showing national/city capitalization rates and commentary has just been released.

Observations in this quarter’s report include:

  • Most investors remain focused on core assets in proven markets
  • Quality assets are attracting ample debt and equity
  • Today, many investors describe the lending environment as “improved” and “better,” yet still tough with regard to underwriting and terms
  • With regard to debt, deals are being done today that would not have been possible a year ago – or even six months
  • Competition is tough among buyers of quality properties
  • With a limited number of quality offerings to soak up all the pent-up capital, over -all capitalization (cap) rates remain on a downward trend for most of the Survey’s national and local markets
  • Indeed, 26 of 31 markets reported lower cap rates
  • Most investors foresee cap rates going even lower as interest rates are expected to stay unusually low
  • Capital that had been earmarked for distressed real estate is now being redirected to core assets
  • Investors have not completely given up on acquiring distressed real estate but they have reduced their expectation

Houston Office

Capitalization rates for Houston office assets remain static ranging from 7.00 to 12.00% with the average overall cap rate rising 3 basis points to 8.82% from 8.79% last quarter. The Houston energy sector insulated the local economy to some degree from the national recession, but recent events have created uncertainty among several key employment sectors. 67% of survey participants expect cap rates to hold steady over the next six months.

Summary

This quarter’s Korpacz survey confirms our view the market is highly segmented between core assets and those that aren’t period. With leasing markets still lacking any clear signs of improvement investors are unlikely to move beyond top quality properties in tier one markets. As the economy shows more signs of stabilizing and investors have more confidence in the investment market, equity investors  and lenders  are more likely to consider non-core and value add opportunities in secondary markets. Until then, however, the investment market will be restricted to a handful of markets and only select assets.

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