Where do you see cap rates going over the next 24 months?

[Gino Barbaro]

Where do you see cap rates headed in your market over the next 24 months?

We just purchased a B asset at an actual 8 cap in our market.  Unfortunately, it feels as if this is the last hoorah and cap rates are only going to go down from here.

What's going on in your market?

Gino

[Account Closed]

The purpose of a cap rate is to measure what NOI's are trading for a specific market at a particular time for a particular property type. It is basically to value NOI when you are buying commercial properties

But wait Jon H., there's more! Since it is easier and more accurate to value pretty much any residential property by direct sales comparison why EVER consider a cap rate? Jon H., I'm glad you asked. Commercial properties are usually encumbered by long term leases and often have hundreds of leases with some being at market, some below and some above. You can have three identical buildings and even tho their v/c are the same and their expenses are the same they can have drastically different NOI's depending on when their leases were signed. Imagine near identical buildings that have NOI's of $50,000, $100,000 and $150,000. You are buying the NOI's not the buildings so if similar buildings NOI's are selling at a ten cap then each building would be worth $500,000, $1,000,000 and $1,500,000. This is simplified a bit since the buyer would look at the lengths of the leases and the strength of the tenants etc. but cap rate is only meant to look at one year NOI. And a cap rate is never meant to predict profitability so there are other calculations that will determine if the buyer wants a property at market cap rate.

Residential properties are generally NOT encumbered by long term leases except say in the case of rent control where identical buildings can have drastically different NOI's because one has 30 year tenants at low rents and another just replaced their 30 year old tenants that died with new market rate tenants. Those buildings will not sell for the same. Usually a GRM will be used for valuation. Large residential complexes will calculate a cap rate basically because they all will have similar expenses and share information so it is an easy calculation. But they will look at other metrics that are more reliable like price per unit/bedroom/NOI per sf, etc.

If all commercial properties were leased at market every year the buyers and sellers would be more than happy to use the more accurate method of valuation of direct sales comparison. Since that is NOT so then they have to RESORT to a more cumbersome and inaccurate way to measure NOI. That is what is so funny with the little investors here that clamor to use it just because they think it makes them look "professional" and well, smarter than they are. Look Ma, I'm talking cap rates.