Where Are Cap Rates Going?

Where are cap rates going? This is the question I get asked most often. The simple answer is up, but not as much as you might think. Although cap rates are going up, how much may depend on the location, age and quality of your property. Right now we have seen true “A” quality properties rise little while “B” properties and risen more substantially and “C” and “D” properties have risen dramatically.

In late 2005, all of 2006 and early 2007 the spread between “A” properties and “C” was almost nonexistent. Today the spread may be as much as 250 to 300 basis points. There are several factors contributing to this but financing is the most prevalent. After the credit meltdown, lenders have become more selective on the deals they will take, buyers have become extremely more selective and occupancies have dipped across markets.

It will be interesting to see what direction cap rates move over the next several months. Although I can’t predict the future, I can see nothing that leads me to believe we will see cap rate compression anytime soon.

If you are sitting on the fence about selling, I would move now.

Look for my post next week about underwriting and how it has changed.