Investing in commercial real estate comes with risks as well as opportunity and you want to ensure you get an appropriate return on your investment. Our monthly blog summarizes market yields at the end of the month to provide context for the likely range the market will offer for commercial real estate cap rates. If you’ve uncovered investment opportunities that exceed this range, you’re beating the market!
Market based cap rates typically lie somewhere in the range shown below based on the risk profile of property investment against a range of financial assets. If you’re interested you can read the original article here.
August Month End Yields
At the end of August rates across the range of financial assets barely moved compared to July except the ten year treasury note which showed some tightening over the month. There’s speculation that financial investors are moving towards safe-have assets though these short term (month to month) moves do not seem to have affected yields further up the risk curve yet.
Note: Longer term risk assets (public and private equity returns) will be reviewed annually and thus will remain the same for the next few months.
Published rates for commercial property loan and construction loan rates are unchanged from July. If you’re using leverage for your property investment these rates set a floor for the cap rate, especially in markets which don’t exhibit major capital appreciation opportunities.
Target cap rate for investors
From my perspective, an appropriate cap rate ceiling remains around around 5%, or a 20x valuation multiple on first year net operating income, although this depends partly on your financing cost. To provide headroom in the event of interest rates starting to rise and to recognize the additional risk involved, I would continue to target at least 7% in this economic environment. Of course, cap rates in more capital appreciation focused locations such as NYC will be tighter.
I expressed a personal opinion on cap rates above, but naturally data is better! Are you looking for independent sources of cap rates? Check out the data explorer by dmi.io.