Cap Rates and Commercial Property Prices
This recent article from the Federal Reserve Bank of San Francisco examines the merit of capitalization rates, the expected returns in commercial properties as an economic indicator. Do the the recent declines in cap rates signal a commercial real estate market that is rebounding?
“The degree to which regional property markets move with the national market is an empirical question. According to our analysis, the national CRE cycle accounts for about two-thirds of the variation in office cap rates across cities over time. For most cities, the national cycle explains around 80% of cap rate movements. However, the nationwide percentage is lower because a few cities have very distinct CRE cycles. For example, Houston CRE prices reflect the energy market, while San Jose and Oakland, California, prices move with the technology cycle. These cities are exceptional. Local factors are less important in most cities, where CRE prices move relatively closely with the national cycle.”