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    Capitalization Rate Analysis

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    FIIM12
    This document discusses capitalization rates and provides forecasts for various property types in Pittsburgh and nationally. It defines capitalization rates as the ratio of net operating income to property value, which allows comparison of investment returns. Recent capitalization rate trends are shown for multi-family, retail, office, and industrial properties both nationally and in Pittsburgh. The document predicts capitalization rates may rise nationally if oversupply occurs or financing availability remains limited, but rates could decline with economic and job growth. For Pittsburgh specifically, it forecasts multi-family will have the lowest rates while retail will see higher rates due to weak demand.

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    Capitalization Rate Analysis

    Uploaded by

    FIIM12
    61 views20 pages
    This document discusses capitalization rates and provides forecasts for various property types in Pittsburgh and nationally. It defines capitalization rates as the ratio of net operating income to property value, which allows comparison of investment returns. Recent capitalization rate trends are shown for multi-family, retail, office, and industrial properties both nationally and in Pittsburgh. The document predicts capitalization rates may rise nationally if oversupply occurs or financing availability remains limited, but rates could decline with economic and job growth. For Pittsburgh specifically, it forecasts multi-family will have the lowest rates while retail will see higher rates due to weak demand.

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    Cap Rate

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    This document discusses capitalization rates and provides forecasts for various property types in Pittsburgh and nationally. It defines capitalization rates as the ratio of net operating income to property value, which allows comparison of investment returns. Recent capitalization rate trends are shown for multi-family, retail, office, and industrial properties both nationally and in Pittsburgh. The document predicts capitalization rates may rise nationally if oversupply occurs or financing availability remains limited, but rates could decline with economic and job growth. For Pittsburgh specifically, it forecasts multi-family will have the lowest rates while retail will see higher rates due to weak demand.

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    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    61 views20 pages

    Capitalization Rate Analysis

    Uploaded by

    FIIM12
    This document discusses capitalization rates and provides forecasts for various property types in Pittsburgh and nationally. It defines capitalization rates as the ratio of net operating income to property value, which allows comparison of investment returns. Recent capitalization rate trends are shown for multi-family, retail, office, and industrial properties both nationally and in Pittsburgh. The document predicts capitalization rates may rise nationally if oversupply occurs or financing availability remains limited, but rates could decline with economic and job growth. For Pittsburgh specifically, it forecasts multi-family will have the lowest rates while retail will see higher rates due to weak demand.

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    Capitalization Rate Analysis & Forecast

    October 27, 2009

    Paul D. Griffith, MAI, MRICS Managing Director Integra Realty Resources - Pittsburgh

    What is a Capitalization Rate?

    Net Operating Income = Capitalization Rate Value

    Example
    If a building sells for $1,000,000 and the seller forecasts the building will generate $100,000 in net operating income in the first year of ownership, the indicated capitalization rate is 10%.
    Net Operating Income Sale Price $100,000 $1,000,000 10% = Indicated Capitalization Rate

    Why is the Cap Rate Important?


    Allows investors, lenders, analysts, and appraisers to keep score.
    Measures first year rate of return Allows comparison of different property types Allows comparison of different classes of the same property type Allows comparison of rates over time

    Capitalization Rates
    Sources
    Korpaz Viewpoint

    Application
    Class A properties Well located Stabilized with market oriented income stream Multiple tenants

    Multi-Family
    9.00% 8.00% 7.00% 6.28% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 8.00% 7.05% 7.75% 7.00% 5.98% 6.75% 5.76% 6.25% 5.86% 7.84%

    6.50%

    National Quarter 3 Pittsburgh Forecast for year

    Regional Mall
    8.20% 8.00% 7.80% 7.60% 7.40% 7.20% 7.00% 6.80% 6.60% 6.40% 6.20% 6.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 7.17% 7.20% 7.02% 6.86% 7.57% 7.50% 7.50% 7.25% 7.00% 6.78% 7.98% 7.75%

    National Quarter 3 Pittsburgh Forecast for year

    Shopping Center
    10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 9.50% 8.39% 8.00% 7.45% 7.75% 7.36% 7.50% 7.20% 7.50% 7.33% 8.41% 8.25%

    National Quarter 3 Pittsburgh Forecast for year

    CBD Office
    12.00% 10.50% 10.00% 8.48% 8.00% 7.71% 7.07% 6.68% 7.04% 10.50% 10.25% 9.75% 9.50% 9.50% 8.11%

    6.00%

    4.00%

    2.00%

    0.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09

    National Quarter 3 Pittsburgh Forecast for year

    Suburban Office
    12.00% 11.00% 10.00% 8.91% 8.12% 8.00% 8.25% 7.75% 7.24% 8.25% 7.34% 11.00% 9.50% 8.72% 8.50%

    6.00%

    4.00%

    2.00%

    0.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09

    National Quarter 3 Pittsburgh Forecast for year

    Warehouse
    10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q3 04 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 9.50% 8.27% 7.50% 7.03% 6.53% 6.63% 9.25% 8.50% 8.25% 8.46% 8.50% 8.00%

    National Quarter 3 Pittsburgh Forecast for year

    The FutureWhat causes capitalization rates to change?


    Capitalization rates decline when investors forecast the return on investment will increase during the holding period.
    Increases occur in the form of
    Increases in NOI caused by
    employment and population increase contractual rent increases

    Favorable financing leverage Undersupply of a product type

    The FutureWhat causes rates to change?


    Capitalization rates increase when the opposite trends occur. Pittsburgh has had higher cap rates than reported nationally because:
    Net income levels have grown more slowly because the region has had limited population and employment growth. Pittsburgh is considered a tertiary investment market which attracts fewer investment dollars than higher tier cities.

    Why do capitalization rates differ for the same property type?


    Age and condition of the property Length of the lease term Level of rent growth Location of property Balance of supply and demand Cost of re-tenanting Creditworthiness of tenant(s)

    The Future
    Nationally
    Current cap rates are likely to go higher if:
    The commercial real estate market becomes oversupplied because of the inability of owners to refinance properties (foreclosures).

    Current cap rates are likely to decline if:


    Availability of credit and credit terms improve. Demographics improve including higher employment and increasing population.

    Forecast
    Cap rates nationally are unlikely to change significantly until the
    commercial real estate refinancing problem is solved. economy grows, increasing demand for retail space, apartments, office space, and industrial space.

    Over the long term, Pittsburgh will continue to have comparatively higher cap rates than the nation as a whole. However, Pittsburghs comparatively stable economy has resulted in current cap rates which are likely to remain closer to national averages in the short run.

    Forecast
    In Pittsburgh
    the multi-family sector will continue to have the lowest rate of the major property types. A lack of new product and comparatively better financing alternatives will limit upward pressure on multi-family rates. cap rates for retail properties are likely to remain historically high because of weak retail demand.

    Forecast
    In Pittsburgh
    cap rates for suburban office properties in the north and south submarkets will be the lowest because demand is the highest. the Pittsburgh CBD office market will continue to see primarily double-digit cap rates because of limited rent growth, increasing expenses, and higher turnover costs.

    Questions or Comments
    Contact Information Paul D. Griffith, MAI, MRICS Managing Director Integra Realty Resources Pittsburgh 2591 Wexford-Bayne Road, Suite 102 Sewickley, PA 15143 P: 724.742.3324 E: pgriffith@irr.com

    Follow-Up
    Thank you! For attending this presentation. Please email Mary Amore at mamore@irr.com to receive a copy of todays presentation. In addition, if you are interested in receiving a copy of the upcoming 2010 Viewpoint publication, please indicate that in your email.

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