Coldwell Banker Premier Realty

Multi-Family News


Cap Rate compression, REIT earnings
Posted: March 29, 2011 by John McClelland

REIT's have been on a tear in the past year and apartment REIT’s have been doing particularly well. NAREIT finds that apartment REITs had a return of 47% compared to 15.06% for the S&P 500[i]. Actually I found even the S&P returns to be better than I expected as we headed into 2010. I still don’t believe in a lot of public earnings but then again, I am a real estate analyst rather than a securities analyst. The REIT returns have been even more shocking.
Why is the apartment sector faring better than other assets? While I can’t comment on the REITs other than in general terms, we are seeing declines in homeownership as owners are displaced through foreclosure or short sale and enter the rental market. One temporary stop may be apartments. For echo boomers, many of which are in or are approaching the age of possible first-time homebuyers, are often choosing to rent or cannot obtain financing. This has served to buoy rent rolls.
REITs and other significant investors have also been on the search for yield. 3.6% treasuries are not going to do it for those being pressured to grow investor’s money. As a result we have seen Class A apartment buildings in particular become desirable. This is not the typical “distressed” or “challenged” properties we are often approached about. Many of these firms do not need to feel like they stole the asset and are simply happy getting returns with a lower variance. Only strong rent rolls will do.
Combining this search for yield, REIT money financed through sales of stocks or bonds and other itchy monies tired of waiting on the sidelines, we have seen cap rate compression. This has been observed nationally[ii] and we have observed it occur on one occasion in Las Vegas and have heard stories of it occurring elsewhere in the Las Vegas Valley. We are talking about cap rates in the 5.5 to 6% range. We do believe this is largely limited to the multifamily sector so far. I don’t see how that could happen in local industrial or office buildings with the elevated vacancy rates we have.


[i].http://www.reit.com/Articles/Vacancies-Decline-for-Apartment-Owners.aspx
[ii] http://businessnewsexpress.com/commercial-real-estate-shows-slow-recovery/8777366/













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