More Research Shows Cap Rates Likely to Keep Compressing

Multifamily, industrial, retail, and office will all feel continued pressure, NAR says. Opinions are starting to pile up that commercial real estate will remain hot, prices will rise, and as a result cap rates will fall. 

The National Association of Realtors released an analysis that said cap rates were likely to keep compressing in 2022 despite rising interest rates. 

Although typically rising interest rates would push up mortgage costs, creating downward pressure on property prices, that may not be the case, at least for now, because other factors keep pushing prices up and, in turn, further compress cap rates.

Multifamily units as well as single-family rentals and build-to-rent units will see greater demand as higher mortgage rates and house prices expand the pool of people who are no longer able to buy a home. The greater the demand, the greater the potential rent, and investors are buying future rent rolls. 

The Pulse of the Market

The Average Days to Sell dropped in just about every county to the fewest days on the market ever. The Average Days to Sell for the entire Southern California area was just 33 days last month. Similar to the prior week, last week saw a very slight increase in inventory in all counties except the Inland Empire. So, the overall trajectory is up. Cap rates and gross rent multipliers haven’t changed much if at all since the beginning of the year, although that is expected to change as we move through the year. The monthly Absorption Rates for last month increased in every county except the Inland Empire, where Riverside County was unchanged and San Bernardino County was the only county with a lower Absorption Rate.

WHAT TO EXPECT: As I’ve been saying, we probably won’t see much of a change in market conditions until there are at least 1-2 more anticipated interest rate increases. Inventory will continue to increase gradually and prices should keep increasing gradually also. The Inland Empire area will continue to be the hot spot for investors looking to see the highest percentage increases in rents and values. San Diego County will also see strong demand as Average Days on Market continues to be the lowest in Southern California.