Multi-Housing Cap Rates Have Increased 150 Basis Points, According to CBRE

By Anuradha Kher, Online EditorBoston– Cap rates increased by approximately 150 basis points, on average, from May 2008 to March 2009, according to the CB Richard Ellis (CBRE) 2009 Multi-Housing Annual Market Report, which surveys 35 U.S. markets. March 2009 results show that higher cap rate increases were reported for Class A assets compared to Class B and Class C, and value-added compared to stabilized deals. Previously, Class B and Class C cap rates moved upward further and sooner than Class A cap rates. In a third of markets cap rates increased by well over 150 basis points since May 2008 as deterioration in both capital markets and real estate fundamentals intensified, the report found.  “2008 was a year in which investors went from focusing on risk arbitrage to risk triage,” says Peter Donovan, senior managing director of the Multi-Housing Group at CBRE. “Caution has replaced boldness as the pricing of multi-housing has gone from ‘pricing to perfection’ in 2007 to ‘pricing for protection’ in 2008. Buyers prefer well-located Class B+ and Class A properties in primary markets with predictable cash flows.”Donovan says he fully expects this trend to continue through 2009. “Buyers have the leverage and are generally not demonstrating a sense of urgency. There is an expectation among buyers that there will be continued upward pressure on cap rates. We are starting to see signs of distress in the multi-housing loan portfolios of banks and CMBS special servicers,” explains Donovan.However, the report also finds that multi-housing will continue to enjoy unparalleled liquidity and benefit from the existence of the two Government Sponsored Enterprises (GSEs), as well as FHA financing for potential new construction. Other asset classes that were inherently tied to CMBS financing are confronting challenging times as deals with 2009 to 2010 maturities face a constrained debt market. Although the GSEs are tightening underwriting standards with higher debt service coverage ratios (DSCRs) and lower loan-to-values (LTVs) which will put a crimp on proceeds, “all-in rates” have recently been hovering in the 6 to 6.50 percent range. “While in general we do not have the overbuilding conditions of the late 1980’s, we do have, in many cases, the “stealth” destroyer of values: overleveraging. Unfortunately, softening market conditions in many multi-housing markets coupled with 150 to 200 basis point increases in cap rates have put many of these loans at risk. This general sense of distress in the market will set the tone for 2009 and beyond,” says Donovan.In addition to analysis of investment property market trends, the state of the debt and equity markets, the report also provides an outlook on federal agency lending and a snapshot of multi-housing specialty products, including senior, student, tax credit and manufactured housing. The report finds that the credit crunch is impacting new construction in senior housing, as starts of new independent living and assisted living units fell dramatically. While CBRE expect properties located two to three miles from campus to bear the brunt of increased cap rates, with cap rates up 100+ basis points in the last 12 months, the overall fundamentals of this asset class remain relatively unchanged.CBRE Econometric Advisors (formerly CBRE Torto Wheaton Research) partnered with CBRE Capital Markets in the production of this report. The cap rates were based on a survey of CBRE investment sales professionals in their respective markets and are approximations that were current as of March 2009, and have been compared to similar studies done in May 2008 and November 2008.