Are Rising Cap Rates Close to their Peak?Today’s rising cap rate trends in the United States are validated by the analysis of CoStar COMPs data for March 2009, which shows that capitalization rates continue to climb across most markets in the United States. According to the 1st quarter 2009 Korpacz survey of more than 100 major real estate investors in the United States, capitalization rates are expected to continue to rise. In fact, in the next six months, they are expected to register increases of about 50 basis points across all property types and most metropolitan markets in the United States. Capitalization rates for power centers, suburban office and regional malls are expected to increase the most - 65 to 74 basis points. The Korpacz survey indicates that it will take at least six more months for cap rates to peak, but it could certainly take more than that. Based on the historical behavior of the US commercial property market, it can be argued that cap rates will turn around when the tenant market starts showing solid signs of recovery with rising absorption, declining vacancy rates and increasing rents. The timing of the recovery of the tenant market in the US will depend on the timing of the economic recovery. According to Moody's latest forecast, the US economy will turn around in the fourth quarter of 2009, after declining in the first three quarters of 2009, resulting in a total contraction of 3.7% in Gross Domestic Product. It should not be noted that it will likely take some time for the tenant market to show clear signs of a turnaround after the economy turns around. In sum, based on Moody’s forecast, it can be argued that the cap rate peak in the US real estate market may be several months ahead. However, making accurate forecasts in this environment is very difficult and continuous monitoring of developments in the economy and the real estate market, especially in terms of rents, vacancy rates and capitalization rates, is needed.
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