I have seen many real estate investment offerrings lately. One listing in particular just caught my attention. It is a net leased, single-tenant retail property here in Greater Boston. The tenant has top-rated credit and the lease was recently renewed for 20 years. It is listed for sale with a cap rate of 9.0%, assumable financing and a cash-on-cash rate of 10.80%.
In comparison, many similar real estate investments are priced at 7.0% – 8.0% cap rates. Since one component of the cap rate is the cash-on-cash rate, I can reasonably assume that the lower cap rate priced properties will provide a lower cash-on-cash return to an investor buyer.
‘Expect to see slow stabilization in the Boston investment market, while the credit crisis impedes activity. Cap rates will increase, while transaction volume will decline.’ Grubb & Ellis’ 2009 Investment Real Estate Forecast Report
Higher cap rates is a trend that real estate researchers predicted for 2009. This is not only happening in the retail market, it was also forecasted for the apartment, office and industrial markets. Of them, the apartment market was expected to experience a lesser rise in cap rates than the office and industrial markets. One bright spot is that the apartment market should experience some sales activity since investors will be on the lookout for acquisitions and banks are more confident in financing apartment buildings than other investment real estate.
Higher cap rates for properties listed ‘for sale’ means that seller price expectations will begin to reflect investor return requirements. This will have a positive impact on sales activity since the offer/ask price spread will narrow.
