GLA/OC MarketFlash | LA Cap Rates

	Industrial was the only sector in the Greater LA region that recorded tightening cap rates during the first half of 2017, while the office and multifamily sectors remained unchanged and retail and hotel cap rates increased. Los Angeles, along with other coastal California markets, has some of the lowest cap rates in the nation for all types of 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, continuing the trend observed in recent surveys. CBD and suburban stabilized cap rates ended H1 2017 at an average of 5.56% and 6.56%, respectively, while value-add product held firm at 7.00% and 8.00%. Stabilized CBD office spreads over the 10-year U.S. Treasury rate increased from 311 to 325 basis points (bps). The spread for CBD value-add acquisitions widened to 469 bps, an increase of 14 bps from H2 2016. Value-add acquisitions had equally-sized spreads. CBRE professionals predict no change for the second half of the year. Figure 1: LA 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 inched down 4 bps to finish H1 2017 at an average 5.42%, driven largely by a modest 13-bp compression in stabilized Class B assets, which ended H1 2017 at 5.25%. Industrial cap-rate spreads over the 10-year Treasury rate increased to 311 bps from 301 bps. For Class A stabilized acquisitions, the spread averaged 194 bps, up from 180 bps in H2 2016. The spread for value-add acquisitions also widened to 369 bps, an increase of 14 bps from the previous survey. Cap rates are expected to remain unchanged over H2 2017. Figure 2: LA Industrial Cap Rates for Stabilized Properties by Sector & Class (All) Source: CBRE North American Cap Rate Survey, H1 2017.

	Movement in cap rates across retail segments was almost exclusively upward in H1 2017. Stabilized grocery-anchored neighborhood centers recorded an 8-bp increase in cap rates in H1 2017, moving to 6.42% for all classes. Class A stabilized product was the only segment to remain unchanged, while Class B and C cap rates both increased by 13 bps. Power centers registered steeper increases, and consequently wider spreads. For all classes, stabilized power center assets ended H1 2017 at 6.00%, up 21 bps from 5.79% (Class B and C increased slightly more than Class A). Lastly, high street retail remained stable at 3.75% for the first half of the year. 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 cap rates (decrease of <25bps). Figure 3: LA Retail Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North American Cap Rate Survey, H1 2017.

	Multifamily asset pricing held firm in H1 2017. Both cap rates and returns on cost remained at historically low levels, indicating strong investor interest and willingness to pay high prices at low rates. The overall multifamily cap rate for stabilized infill assets stayed flat at 4.75%. Among Class A assets, Los Angeles had the lowest in the nation at 4.00%. For value-add acquisitions, pricing remained very strong, and ended the first half of the year with an average of a low 5.29%. Suburban multifamily pricing also remained stable and strong. Cap rates for stabilized multifamily properties did not change in H1 2017, staying at 5.00% and value-add properties not too far behind at 5.25%. Local professionals project infill and suburban cap rates to stay unchanged for the second half of the year. Figure 4: LA Multifamily Cap Rates for Stabilized Properties by Sector & Class Source: CBRE North American Cap Rate Survey, H1 2017. The average CBD hotel cap rate in Los Angeles jumped by 50 bps in H1 2017 to 7.50%, as all sub-sectors recorded identical increases. The overall hotel cap rate spread over the 10-year Treasury note jumped to 519 bps, up from 455 bps in H2 2016. Professionals expect increases in all hotel cap rates in the second half of 2017. Figure 5: LA Hotel Cap Rates for Stabilized Properties by Sector & Class (CBD) Source: CBRE North American Cap Rate Survey, H1 2017.

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