Commercial real estate prices are showing signs of stabilizing as inflation moderates and the Federal Reserve nears the end of its interest rate hiking cycle, according to a survey from real estate firm CBRE.
The CBRE survey, which tracks pricing trends for major property types in the U.S., found that capitalization rates have begun to level off after climbing sharply in the second half of 2022 as investors adjust to the new, higher rate environment. Overall, commercial real estate pricing appears poised to stabilize in the second half of 2023, with office property values delayed until early 2024.
“We are starting to see signs of stabilization in the investment market after a period of rapid cap rate increases," Tom Edwards, Global President of Valuation & Advisory Services for CBRE, said in a release. “If inflation stays under control and the Fed does not continue to lift rates, investor confidence should improve, leading to more stable pricing and increased liquidity by mid-2024.”
CBRE’s survey examined investment sentiment on capitalization rates, which measure property returns by dividing the annual income by the sale price. A lower cap rate generally indicates a higher value. The study found that:
• retail cap rates rose the least, supported by strong fundamentals, income growth and attractive pricing.
• multifamily cap rates also rose modestly, though oversupply concerns linger in some markets.
• industrial cap rates expanded moderately, reflecting more conservative underwriting.
• office cap rates increased the most as investors sought larger discounts due to persistent challenges in the sector.
The “U.S. Cap Rate Survey H1 2023 (CRS)” was conducted in late May through early June 2023 and reflects transaction activity in the first half of 2023. Dallas-based CBRE noted that while market conditions are fluid, the CRS provides a useful baseline and sheds light on how investor sentiment is evolving. The CRS captures more than 3,000 cap rate estimates across more than 50 geographic markets.