The mean retail cap rate decline by 30 basis points during the quarter to 7.2%. Despite this, the 12-month rolling cap rate was unchanged at 7.4%. This is the first time in about a year that the mean cap rate has fallen below the 12-month rolling cap rate, indicating some recent pricing momentum in the market and intimating that the 12-month rolling cap rate could be heading lower in the coming quarters.
Moreover, the 12-month rolling cap rate remained roughly 70 basis points below the historical average of that metric. This is a bit wider than what we observed for apartment and office although it is roughly in line with the difference from the last two quarters. Over time, retail properties continue to get more expensive, with all of the aforementioned cap rate measures at or near post-recession lows.
Ongoing improvements in the labor market and consumer spending are slowly translating into more demand for retail goods and space while supply growth remains muted. That doesn’t mean that this property sector isn’t without its challenges, but that despite the obvious headwinds investors are finding some value in retail centers. And this is an interesting point – vis-à-vis the other major property types, it is not a stretch to say that retail (in our case here neighborhood and community centers) faces the most serious structural challenges such as the inexorable rise of e-commerce and the proliferation of new retail subtypes complicates the landscape. Yet, investors are finding enough value that cap rates are at these levels today.
Reis Cap Rate Proforma
Cap rates are a measure of a property’s investment potential, independent of the specific buyer.
Investors, lenders, and appraisers use the current cap rate from Reis to estimate the appropriate purchase price for different types of income producing properties.
Cap Rate = Net Operating Income / Purchase Price
To give our clients a complete picture of the income value of a specific property Reis evaluates three cap rates in our proformas, which are included in our sales comps, and can be seen in the cap rates proforma example above.
Estimated Going-In Cap Rate
- An overall capitalization rate obtained by dividing the projected net operating income for the first full calendar year of ownership by the purchase price
12-Month Rolling Cap Rate
- The 12-Month Rolling Metro Cap Rate is calculated from the average of the metro’s mean cap rate from the previous four quarters and provides a benchmark rate of comparison
Reported Cap Rate
- The Reported Cap Rate (per sale) is reported directly by the buyer, seller or other party to the transaction, and is calculated by dividing reported net operating income by the purchase price
Source: REIS Ryan Severino on Mar 18, 2016