Retail properties have the highest cap rates in the U.S. in 2023, followed by office. Office real estate cap rates were 6.54% in the fourth quarter of this year and are expected to rise to 7.39% in 2024. Cap rates measure the expected return on investment and represent a property's net operating income as a percentage of its current asset value. A higher cap rate means higher returns, but also higher risk.
Why have cap rates increased?
The rise in cap rates is the result of a repricing of the commercial real estate sector. According to the National NCREIF Real Estate Revenue Index, commercial real estate prices for 2023 fell across all property types. Rent growth over the same period was slow and yields were negative for the year. The rise in cap rates reflects increased risk in the investment environment.
Price uncertainty in the commercial real estate sector
From 2014 to 2021, U.S. commercial real estate prices rose steadily. Access to financing at low interest rates fueled economic growth and real estate investment. Lending policies were tightened as inflation soared over the next two years. This had a major impact on the industry. First, occupant sentiment worsened. Second, it led to a decline in demand for commercial space and commercial real estate investment volumes. Uncertainty regarding future trends in interest rates and occupant demand further contributed to the repricing of real estate assets.