Cap Rates Stable Despite Disconnect Between Buyers and Sellers
|National multifamily, office, and seniors housing cap rates held steady during the third quarter as private commercial real estate valuations exhibited stability despite the pandemic. Preliminary estimates from Real Capital Analytics (“RCA”) indicate multifamily and office cap rates essentially held steady at 5.2% and 6.5% respectively. Seniors housing cap rates edged up 17 basis points to 6.0%. RCA noted that transaction activity slowed relative to historic levels, though activity began to pick up toward quarter-end.
Stable cap rates have translated into stronger relative yields on commercial real estate compared to pre-pandemic levels. 10-year treasury yields have halved since the end of January to approximately 0.8%, the lowest level in decades. As shown below, cap rate spreads have widened significantly compared to year-end for 2019 and 2018.
CBRE’s Q3 Cap Rate Survey shows meaningful variation across markets, however, with some metros seeing quarter-over-quarter swings of 25 to 50 basis points. In multifamily, Atlanta, Baltimore, Chicago, Nashville, and Tampa saw cap rate compression, largely due to more cautious forward income assumptions during the first year of ownership. In office, San Jose saw the largest decrease in cap rates for the same reason, while a few Sun Belt markets saw modest cap rate expansion.
Looking ahead, CBRE also notes a divergence in buyer and seller expectations, which is likely to affect pricing trajectories. Across asset types, 61% of buyers expect a discount compared to early 2020 pricing, but only 9% of sellers report a willingness to offer such discounts. With sellers holding firm, we expect to see pricing stability so long as owners continue to be able to obtain refinancing at reasonable terms and meaningful amounts of dry powder provide lift to these sectors.
Spreads Between Cap Rates and 10-Year Treasury Yields
Unemployment Claims Data Suggest Continued Disruption in the Labor MarketSeveral months into the pandemic, new and continuing unemployment claims persist at stubbornly high levels, underscoring continued instability in the labor market despite the 11.4 million jobs added nationwide over the past five months. After decreasing slightly during the most recent week of data to 840,000, initial jobless claims remain well above the pre-pandemic record of 695,000. Another 25.5 million people received continuing benefits across conventional and pandemic-specific programs. This total has trended downward over the past few weeks, reflecting improvement in the labor market. But recent decline was also partially a result of California’s decision to temporarily pause reporting while the state employment agency addresses fraudulent cases and a backlog in filings. Moving forward, we expect to see further declines in payouts of state unemployment insurance (UI) as more people reach their 26-week limit. Many of these individuals are likely to rotate into the Pandemic Emergency Unemployment Compensation (PEUC) program, which extends benefits coverage by 13 weeks. As expected, PEUC benefits have increased steadily over the past several weeks, although the gains have been much smaller than the reductions in UI to date.
Weekly Continuing Unemployment Claims
Consumer Perceptions Driving Variances in Local Economic Activity
|Consumers have long driven the U.S. economy and contribute to nearly 70% of U.S. GDP. As the recovery progresses, consumer expectations of their personal financial situation will play a key role in the trajectory of the recovery of local economies. Bloomberg’s Consumer Comfort Index (CCI) suggests consumer views of their personal finances are fueling the stronger overall sentiment that was noted in last week’s Brief, while perceptions of the state of the economy represent a significant drag on CCI.
However, the Census Bureau’s Household Pulse Survey reveals a wide delta in consumer expectations across the U.S. Consumers in Nebraska, Iowa, and Wyoming are the most optimistic with 16.0% or less of survey respondents saying they anticipate a loss of household income in the next four weeks. In contrast, more than 30.0% of respondents in Hawaii, California, and Nevada expect to lose income.
States with more optimistic consumers have tended to experience a more rapid recovery in non-essential spending, as measured by restaurant reservations. For example, bookings in Nebraska are down only 36.8% YOY, compared to a year-over-year decline of 90.2% in Hawaii.
Both the sentiment survey and restaurant bookings data also underscore how the dense, major metros are generally lagging state-level trends. For example, New York City, Los Angeles, and Chicago are all seeing more pessimism among resident households as well as substantially slower recoveries in restaurant bookings.
Consumer Expectations of Income Loss vs. Year-on-Year Change in Restaurant Bookings by State
The Weekly Briefing - October 12th, 2020
The Weekly Briefing – October 12th, 2020:
In This Week’s Brief:
- Cap Rates Stable Despite Disconnect Between Buyers and Sellers
- Unemployment Claims Data Suggest Continued Disruption in the Labor Market
- Consumer Perceptions Driving Variances in Local Economic Activity