Jun
20

Reis: Office Market Cap Rate Trends

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The office market followed fourth quarter’s impressive performance with continued momentum. After the mean cap rate compressed by 70 basis points during the fourth quarter, it compressed by another 30 basis points during the first quarter of this year to fall to 6.7%. This is the lowest that the mean cap rate has been since the third quarter of 2008, before the market hit the skids, when it stood at 6.4%. Although the mean office cap rate has been somewhat idiosyncratic over the last few years, at this juncture that kind of cap rate expansion seems unlikely. The mean cap rate might continue to jump around in the future, but a recovering office market should keep cap rates compressing for the foreseeable future.

In contrast, the 12-month rolling cap rate is not approaching the low levels that were reached before the market imploded. The 12-month rolling cap rate is still approximately 80 basis points above where it bottomed during the third quarter of 2008. We will need to see more than two quarters of compressing mean cap rates if we are to test that low, which indicates we should pay close attention to cap rates in the coming quarters. But if the 12-month rolling cap rate starts to test historically-low cap rates, that would mean that the recovery is becoming more entrenched and investors are buying office properties in anticipation of improving fundamentals over the medium-term.

 

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