Investors have mostly ignored the large interest rate increase from earlier this year and maintained their pace of purchasing properties in the same locations at virtually the same prices, National Real Estate Investor reported Sept. 18.
The most recent figures from commercial real estate analytics firm CoStar showed a steady volume of investment sales in the months since rates have gone up.
“Investors were expecting that interest rate rise,” Walter Page, director of CoStar’s U.S. research for office, told National Real Estate Investor. “A 1 percent rise to interest rates was fully baked into the numbers.”
However, Page noted that additional interest rate increases could affect purchasing habits. Specifically, one additional percentage point added to the yield on 10-year Treasuries and other investments that compete with commercial real estate for investor attention could add half a percentage point to cap rates.
CoStar’s preliminary numbers revealed that investors still are bidding higher prices for properties in expensive core markets, and that the volume of investment sales has been consistent.
“We’ve seen some record pricing on stuff across the country,” Page told National Real Estate Investor. For example, CoStar’s data showed that for the top 20 percent of office building sales in New York City the median price climbed past $1,200 per square foot; 12 percent more than the prior peak in 2007. Page noted that San Francisco has seen a similar increase.
A total of $20.4 billion in office properties changed hands in the second quarter in the U.S., up from $18.4 billion the previous quarter and $19.3 billion in the second quarter of 2012. Page said that the high volume of sales has continued into the third quarter.
Prices remain strong for many property types, other than garden apartments whose prices have dipped slightly relative to income.
Cap rates for garden apartments are up about 20 to 30 basis points nationwide, according to data from real estate data firm Real Capital Analytics, National Real Estate Investor reported. Average cap rates for garden apartments currently are about 6.5 percent — up from 6.2 percent at the beginning of the year, with most of the increase occurring in the spring.
According to RCA, cap rates for other property types remain low. Apartments are 6.1 percent overall, office properties are down to approximately 6.8 percent from 7.1 percent earlier this year. Retail spaces are at 7 percent, down slightly from 7.1 percent.
Interest rates increased notably during the summer after officials at the Federal Reserve indicated that they might start tapering off their quantitative easing program later this year. The yield on 10-year Treasuries went up from 1.8 percent in May to more than 2.9 percent as of Sept. 18.
Page told National Real Estate Investor that investors had been expecting the interest rate increase, and he first noticed the effect earlier this year in the difference between capitalization rates on the sales of commercial real estate properties and the yield on 10-year Treasury bonds. “The spreads were abnormally large.” The uptick in Treasury bond yields has put the difference between cap rates and Treasury bond yields into a more typical range.
Additionally, an extra point in yields for Treasury bonds has not led to an extra percentage point in interest charged to commercial and multifamily real estate properties. This is partially because most lenders never offered interest rates as low as some might expect based on the low Treasury yields. Rather, the spread widened and lenders kept the overage; banks didn’t follow the Treasury rates all the way down. When Treasury yields went up again, banks didn’t have to add that increase directly to their interest rates.