By John Covaleski, Commercial Real Estate Direct Staff Writer

As property sales continue declining, sellers are finally showing signs of trying to bridge bid-ask gaps with prospective buyers, according to Real Capital Analytics.

The roughly $4.76 billion of property sales during October was down about 75 percent from the same time last year, but capitalization rates have been rising for all sectors, according to the New York research firm.

"For those deals that are getting done, sellers are grasping the realities of this market place," the firm said in its latest Capital Trends Monthly report.

In the office sector, the average asking cap rate since the start of the year has risen about 25 basis points to a 7.25 percent average, the highest since July 2005. In industrial, the average asking cap rate since the second quarter has risen about 10 bp to almost 7.5 percent.

Not surprisingly cap rates for all completed transactions this year are up when compared to last year.

Average Cap Rates for Closed Transactions

Source: Real Capital Analytics

Investors are clearly demanding greater risk premiums than last year. That's indicated by a 343 bp spread over Treasurys for cap rates on deals completed in October, which is up from a 153 bp spread in June 2007.

Cap rates have been rising particularly sharply in recent weeks for all sectors except multifamily, where they have leveled off but are still up 13 bp from April.

Average asking rates vary widely from the rates of completed deals during certain periods because properties listed for sale may not sell until weeks or months later. It's also become more likely for properties to be pulled from the market, as noted by a Commercial Real Estate Direct report that determined $47 billion worth of offerings had been pulled this year through early October.

Real Capital hailed the rising cap rates as evidence of a narrowing in the wide gaps between bid and ask prices, which have been a key element in the past year's sales slowdown.

The newest reality that sellers now face is that equity, which had seemed prime for property investments a few months ago, has dried considerably in recent weeks, since the banking and investment banking sectors fell into turmoil and stock prices plummeted.

That decline in available equity would compound the sales slowdown, which has been driven by the lack of debt financing over the past year.

According to Real Capital, virtually all the key groups of investors are now sidelined or hobbled:

- REITs' ability to buy is hurt by their declining share prices;

- Sovereign wealth funds and German funds are both curbing their investments;

- Institutions are dealing with the so-called "denominator effect," in which the value of their entire portfolios falls, prompting in many cases an over-allocation to any sector, including real estate.

Real Capital further said that equity funds will likely face a tougher time raising capital commitments in today's economy and that private investors may see more immediate upside from investing in stocks rather than real estate.

It also noted that private investors may be inclined to sell property to avoid an increase in the capital gains tax rate that has been proposed by President-elect Barack Obama and that the denominator effect could conversely force some institutions to liquidate real estate holdings to balance their portfolios.

Additional supply at a time when demand from buyers has been weak could result in further upward pressure on cap rates.

Despite the widening in cap rates so far, sales activity remained stifled through October. For example, only $2.3 billion of office properties changed hands in October. That's down 61 percent from the $5.9 billion of deals last October.

Multifamily, whose sales are being helped by the still-available financing from Freddie Mac and Fannie Mae, recorded $1.5 billion of October sales, versus $4.7 billion a year earlier. The retail sector's volume dropped 75 percent to $900 million, while industrial's dropped 88 percent to $436 million.

Comments? E-mail John Covaleski or call him at (215) 504-2860, Ext. 208.