BK Perspective Real Estate USA 2016

Perspective on Real Estate 2016 - U.S.
Fig. 3.2
U.S. Cap Rate Trends Relative to Treasuries
Cap Rate / Treasury Rate (%)
10
1,000
9
900
8
800
7
700
6
600
5
500
4
400
3
300
2
200
1
100
0
0
-1
Cap Rate Spread
10-Year Treasury -100
Cap Rate 4 Qtr Moving Avg. 25-Yr Average Spread
-2
-200
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Spread (bps)
Sources: NCREIF (transaction-based cap rates), Federal Reserve, Moody's Analytics
As of 3Q 2015, average cap rate spreads over riskfree
for core/core plus properties as represented in
the NCREIF transaction-based series (see Fig. 3.2)
remained above long-term historic levels. Spreads
were even more amplified upon review of a broader
cross section of the market provided by Real Capital
Fig. 3.3
U.S. Transaction Volume by Property Type
Sales Volume*, Billions ($)
500
450
400
350
300
250
200
150
100
50
0
Apartment
Office
Retail
Industrial
02 03 04 05 06 07 08 09 10 11 12 13 14 15
* Rolling 4 Quarter Total Investment Activity
Source: Real Capital Analytics, Inc.
Analytics which also included additional smaller and
secondary market assets. Given these relatively large
spreads, cap rates should be able to absorb any nearand
medium–term interest rate uplift while preserving
asset values. In addition, property net operating
income is expected to grow as the economy
continues to improve and supply and demand remain
in balance, further supporting property value stability.
According to Real Capital Analytics, transaction
volumes through 3Q 2015 were up approximately
21% year-over-year on a combined basis across
all property sectors, although the rate of increase
decelerated through the year. The apartment and
industrial warehouse sectors were notable standouts
leading growth in transaction activity largely via
portfolio and “mega” deals involving domestic
private equity, sovereign wealth funds and other
foreign investors. Although it increased over the
prior year, retail transaction volume was the obvious
laggard. Retail property sales momentum was healthy
in the largest U.S. markets, but investors seemed to
shun secondary locations, particularly as the evolving
retail landscape created challenges for brick-andmortar
retailers (see Fig. 3.3 and Retail section).
28 | Bentall Kennedy (U.S.) Limited Partnership