Tag Archive for: cap rates

The real estate market is constantly evolving. It’s influenced by various factors such as economic conditions, market trends, and investor sentiment. As such, forecasting the capitalization rate of  property types such as office, industrial, and retail properties, requires careful analysis and consideration of multiple variables. We at Keegan & Coppin will delve into the North Bay Area real estate market and provide an estimated 5-year forecast on the capitalization rate of these property types.

The North Bay Area, known for its picturesque landscapes and proximity to major metropolitan areas such as San Francisco, has long been a desirable location for real estate investors. However, like any other market, it is not immune to fluctuations and changes. Let’s take a closer look at each property type and their respective capitalization rate forecast.

Office Properties: The office market in the North Bay Area has historically been strong, driven by demand from various industries such as technology, healthcare, and professional services. However, in recent years, the office market has experienced some challenges due to changing work dynamics, including the rise of remote work and flexible office space options.

Over the next 5 years, it is expected that the capitalization rate for office properties in the North Bay Area will experience some upward pressure. This can be attributed to potential oversupply in certain submarkets, as well as the continued uncertainty around the future of office space demand. As remote work becomes more prevalent and companies reassess their office space needs, some investors may demand higher returns to compensate for increased risk. However, prime office properties in prime locations with strong tenant profiles are likely to remain resilient, and the impact on capitalization rates may be moderate.

Industrial Properties: The industrial market has been a standout performer in recent years, driven by the growth of e-commerce and logistics. The North Bay Area, with its proximity to major transportation hubs and favorable business environment, has seen strong demand for industrial properties from companies looking to expand their supply chain operations.

Looking ahead, the industrial market is expected to continue its upward trajectory, with the capitalization rate for industrial properties in the North Bay Area projected to remain relatively stable or even decline slightly over the next 5 years. The ongoing growth of e-commerce, the need for last-mile distribution facilities, and limited supply of industrial properties are expected to support continued investor interest in this property type, potentially leading to compressed cap rates in prime locations.

Retail Properties: The retail market has faced challenges in recent years, with the rise of online shopping and changing consumer preferences impacting brick-and-mortar retail. The North Bay Area, with its unique mix of urban and suburban environments, has experienced varying trends in the retail sector.

Forecasting the capitalization rate for retail properties in the North Bay Area is challenging due to the changing dynamics of the retail market. While some well-located retail properties with strong anchor tenants may continue to perform well, others may face higher vacancies and increased risks. As such, the capitalization rate for retail properties in the North Bay Area is expected to be mixed, with potential variations depending on the location, tenant mix, and property condition. Overall, the retail market is likely to face some headwinds in the coming years, which may result in slightly higher capitalization rates for certain properties.

In conclusion, the North Bay Area real estate market is expected to face some challenges and opportunities in the next 5 years. While the industrial market is projected to remain strong, with stable or even declining capitalization rates for industrial properties, the office and retail markets may experience some upward pressure on cap rates due to changing demand dynamics and increased risks.

As with any investment, it is crucial for investors to conduct thorough research, analysis, and due diligence before making any business decisions.

Commercial Investment Valuations are typically presented as cap rate driven: the lower the cap rates, the higher the price. Investors have the challenge of balancing asset security and safety vs. an acceptable Cap Rate return.

Security and safety include a matrix of attributes: Extended Lease Term, Quality Tenant with good credit history (and track record of business acumen), LOCATION (both the immediate demographics and street/area positioning), a favorable NNN lease, long term appreciation aspects, and financing desirability.  However; how low can you go? Cap rates in desirable urban settings wafting in under 4% need a compelling story to convince me.

REMEMBER the OLD Adage: “It’s not what you make; it’s how much you keep.”

Evaluating your cash on cash return is as important, if not more important than a cap rate. If your investment is predicated on a 4% cap rate but the cost of the funds is above that, you are going backwards. It can make sense if you are going into a Value-Added Property, or compelling project that offers an opportunity to increase the income to the current market conditions. No one size fits all but sometimes “all that glitters isn’t gold.”