CBRE Survey: Cap Rates Have Peaked

Most respondents expect the expansion in commercial real estate cap rates to have peaked, CBRE said in a bi-annual survey, which polls the company’s capital markets and valuation professionals on the direction of cap rates and the magnitude of the change they expect during the next six months.

The survey found that the most common response across all commercial real estate asset classes was “no change,” CBRE said.

“Improved sentiment is likely driven by more accommodative signals from the Fed and the decline in bond yields from their October 2023 peak,” the company added.

Findings varied across property types, rather than moving “in unison.”

Respondents expected industrial cap rates to fall on average while expected office yields continued their climb, reflecting persistent uncertainty in that sector.

The share of respondents expecting further devaluations in office assets was the highest, CBRE added.

Expected cap rates for Class A offices rose above 8%, while “less competitive Class C spaces are seeing distressed pricing with cap rates estimates averaging in the low teens,” CBRE said.

Moreover, the spread between respondents’ lower and upper estimates of office cap markets widened, suggesting more uncertainty for office pricing, the company said.

“As price discovery proceeds in coming quarters this spread should shrink,” CBRE said.

Overall, uncertainty is likely to continue to weigh down transaction volume across asset classes. Nearly 50% of survey respondents don’t expect sales volume recovery until 2025. The previous survey found most respondents expected a recovery to materialize in late 2024.

As of June 2024, when CBRE concluded its survey, 10-year Treasury yields held at 4.2%, stabilizing on expectations the Federal Reserve would ease monetary policy. That followed a period of Treasury yield volatility driven by mixed signals about the outlook for inflation, Fed policy, and long-term interest rates.