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Tuesday, 04 September 2018

CBRE Expects Cap Rates to Remain Stable for Remainder of Year

Capitalization rates were stable during the first half and should remain that way for the rest of the year. Even if interest rates continue to increase, and the cycle turns, they'll remain stable, largely because of strong investor demand, according to CBRE, which cited properties' relatively low leverage levels and healthy fundamentals.

Commercial Real Estate Direct Staff Report

Capitalization rates were stable during the first half of the year and should remain that way for the rest of the year.

Even if interest rates continue to increase, and the cycle turns, they'll remain stable, largely because of strong investor demand, according to CBRE. They'll also likely weather any potential cyclical turn because properties don't carry as much debt as they did before the Great Financial Crisis, according to Richard Barkham, CBRE's chief economist. He also said absorption has pretty much kept up with the pace of construction.

"I've seen bad cycles for real estate," said Barkham, who joined CBRE in 2014 from the Grosvenor Group, where he had been director of research since 2000. "It can all end very badly. But all of the things that go into a bad cycle, like reckless lending and over-development, don't seem to be present in this cycle."

He added that the appetite from investors remains high, with many institutional investors having increased their allocations to real estate in recent years. They are seeking higher returns than they can get in the bond market. He estimated that investors, including real estate funds, have more than $1 trillion of dry powder that is intended for real estate investments.

Preqin recently estimated that real estate funds had $290 billion of dry powder. That number doesn't include capital that investors have allocated for direct...


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