Investor Activity Will Further Compress Cap Rates This Quarter

Cap rates for highly desirable assets have compressed as the COVID-19 pandemic winds to a close, as limited supply and investor optimism drives up prices in certain regions of the US. 

Despite contracting yields, the margins for well-positioned assets remain wide when compared to other low-risk investment options, according to a report from Marcus & Millichap.

“Strengthening economic tailwinds should boost commercial real estate fundamentals this year, inciting recovery speculation among investors and spurring buyer activity,” the report notes. “At the same time, the recovery has thus far been uneven, with some cities, states and property types jumping ahead of others, generating a broad range of valuation variance.”

Owners are in a holding pattern in some regions, M&M experts note, a trend that’s further compressing supply and leading to a supply and demand gap that’s slowed deal flow for underperforming assets. And as buyers turn their eyes toward assets that have best weathered the pandemic—think industrial, multifamily and self-storage properties—they’ve sparked in many circumstances a competitive bidding process that’s further compressed cap rates. Investors are predicted to look to hotels, certain types of retail assets, and seniors housing as potential targets this quarter, as these property types are expected to rebound quickly post-COVID. 

“While some discounting has occurred in unique situations, valuations of most asset types have largely held steady or surpassed pre-health crisis levels as strong buyer interest has aligned with limited for-sale inventory,” the report says.

Going forward, Marcus & Millichap predicts investor momentum will continue and will even carry over into certain markets and asset classes that have struggled most during the pandemic.

John Chang, senior vice president of research at Marcus & Millichap, says student housing and seniors housing will likely rebound as schools open and vaccine programs accelerate.  A “unique confluence of events…have shaken up traditional real estate investment models and that has created a very dynamic set of options,” he said in a recent video breaking down the investment outlook for 2021.

“The spectrum of options has ever been more compelling—especially for investors who keep their eyes on the horizon,” Chang said.