GLA/OC MarketFlash | OC Cap Rates

	Multifamily was the only sector in the Orange County region that recorded tightening cap rates during the first half of 2017, while the office and industrial sectors remained unchanged and retail and hotel cap rates increased. Orange County, along with other coastal California markets, has some of the lowest cap rates in the nation for all properties. The general outlook for cap rates and returns on cost in the second half of 2017 is for stable pricing. The consensus is that if rates do change in H2 2017, they are more likely to increase modestly. Office CBD and suburban cap rates remained unchanged at the end of H1 2017. CBD stabilized rates stayed at an average of 5.56%, the lowest level since the survey began in 2009, while the return on cost for value-add acquisitions averaged 7.50%. Stabilized suburban cap rates averaged 6.69% through the first half of the year, while value-add product registered a return of 8.17%. Cap rate spreads over the 10-year Treasury rate have increased by 14 basis points (bps) across all office product. CBRE professionals predict no change for the second half of the year. Figure 1: OC Office Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North America Cap Rate Survey, H1 2017. Industrial cap rates for acquisitions of stabilized assets ended the first half of the year at an average of 5.50%, unchanged from H2 2016. Value-add property acquisitions stood at 6.08%, also unchanged from the previous survey, and essentially stable since 2014. While Class B cap rates have remained flat for several years, the spread between stabilized Class A and C assets have gradually widened, from 62 bps in H1 2014 to 263 bps in H1 2017, with Class A rates staying at a low of 4.25% for the fourth consecutive survey. Overall, industrial cap rate spreads over the 10-year Treasury rate increased to 319 bps, up 14 bps from H2. Value-add rates recorded equally sized spreads. Cap rates are expected to remain unchanged over H2 2017. Figure 2: OC Industrial Cap Rates for Stabilized Properties by Sector & Class (All) Source: CBRE North American Cap Rate Survey, H1 2017.

	Retail cap rates widened modestly in the first half of the year. Stabilized grocery-anchored neighborhood centers increased by 11 bps to end H1 2017 at an average of 7.23%, while value-add product yielded 8.98%. The widening in cap rates was driven largely by increase in Class C rates. Power centers registered steeper increases, and consequently wider spreads over the 10-year Treasury. For all classes, stabilized power center assets ended H1 2017 at 6.00%, up 21 bps from 5.79% (Class B and C edged up slightly more than Class A). Increases are forecasted across most segments and classes for the second half of the year, with compression expected only in Class A stabilized neighborhood center assets (decrease of <25 bps). Figure 3: OC Retail Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North American Cap Rate Survey, H1 2017.

	Multifamily asset pricing was strong in H1 2017, as Class A cap rates held firm while Class B and C rates tightened, narrowing the cap rate spreads between Class A and B/C properties for both infill and suburban assets. The overall multifamily cap rate for stabilized infill assets edged down to 4.58%. Among Class A assets, Orange County has one of the lowest cap rates in the nation at 4.25%, indicating strong investor interest and willingness to pay high prices at low rates. Suburban multifamily pricing also remained strong, compressing by 37 bps from the last survey, and ending the first half of the year at an average 4.54%, even lower than infill assets. Again, this decrease was driven largely by lower quality assets, with stabilized Class C cap rates falling by 62 bps in both subsectors. Local professionals project infill and suburban cap rates to stay unchanged in H2 2017. Figure 4: OC Multifamily Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North American Cap Rate Survey, H1 2017. Hotel cap rates widened across all sectors, segments and classes by 50 bps in H1 2017. Stabilized CBD assets recorded an overall cap rate of 7.50%, with stabilized suburban assets not too far behind at 7.69%. Stabilized CBD hotel cap rate spreads over the 10-year Treasury rate jumped 64 bps to 519 bps, while stabilized suburban moved up to 538 bps. Orange County has one of the lowest cap rates in the nation for CBD full-service hotels, and the lowest for suburban full-service. Professionals expect no change in hotel cap rates for the second half of 2017. Figure 5: OC Hotel Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North American Cap Rate Survey, H1 2017.

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