September 15, 2022 – Cap rates across nearly all property segments compressed significantly since late 2020. Pent-up demand, lack of supply, eagerness to return to business, and the close of a contentious presidential election all led to the frenzy in buying over the past nearly 24 months. Now that the Federal Reserve has decided to tackle inflation by aggressively increasing the Federal Funds Rate and as interest rates for commercial mortgages have risen between 175-250+ basis points in a matter of months, shouldn’t those compressed cap rates follow? Not necessarily. Cap rates for STNL retail have shown strength during the past few months as interest rates have rapidly increased. The reason? Strong demand for the product type amongst a constantly growing number of individual investors, private equity funds, and others have kept the market in balance. Many STNL transactions are being closed with all-cash or lowly leveraged positions, neither of which are greatly affected by fluctuations in interest rates. That being said, we have begun to see highly leveraged investors require lower pricing to offset higher interest rates. As this continues and more deals need to be re-priced to accommodate these high leverage positions, we would expect cap rates to eventually creep upwards to accommodate the needs of the market.
If you have questions about buying or selling on a national basis, you can reach out to Kyle Hartung, Vice President and Director of Investment Sales at Goodman Real Estate Services Group, LLC.