Respondents were asked to estimate cap rates nationally and generated a figure of 6.35 percent. But respondents think further cap rate compression is unlikely.
Only 27 percent think cap rates will decrease further in the next 12 months. (That’s down slightly from the fall 2015 survey, when 33 percent of respondents said they thought cap rates might decrease.) Another 19 percent expect no change, while 54 percent expect cap rates to increase.
When asked specifically about their region, respondents were a tad more bearish, with just 24 percent expecting further decreases, 16 percent seeing no change and 60 percent expecting cap rate increases.
“Cap rate compression for office transactions has largely played out. We see office prices heading sideways from here,” says Tad Philipp, director of commercial real estate research with Moody’s Investors Service.
In terms of their own plans, more than half of respondents (56 percent) expect to “hold” properties in the sector in the next 12 months. About one-fifth expect to sell (20 percent) and a similar number are looking to buy (24 percent).
The responses indicate that respondents intend to be less active overall, even compared to six months ago. The number of respondents looking to buy fell five percentage points and the “sell” number fell three percentage points, while the number of those saying they would hold rose.
There has been a 5.0 percent increase in office property values over the past 12 months, reports Green Street Advisors, a Newport Beach, Calif.-based research firm. The firm predicts NOI growth in the sector of 4.3 percent from 2016 through 2020.
“The office sector was slow to recover this cycle relative to other property types, but fundamentals have picked up the past couple years, thanks to improving job growth and mostly benign supply. [This year] is forecast to be another solid year in terms of rent and NOI growth, though there has been recent market volatility and economic uncertainty that certainly bears watching,” says Jed Reagan, senior analyst at Green Street Advisors.
In terms of capital availability, responses were similar on both the debt and equity fronts. About two-fifths of respondents said capital availability was unchanged for both categories (43 percent for each), while about one-fourth said capital was more widely available (28 percent on equity, 24 percent on debt).
At the same time, survey respondents do expect a change in loan terms. Whereas six months ago, no respondents expected to see loan-to-value (LTV) ratios decrease, now 23 percent of respondents expect that to happen. In late 2015, 43 percent of respondents expected LTV ratios to increase. Today that number is just 19 percent. The number that expect LTV ratios to remain flat stayed stable (57 percent in 2015, 58 percent today.)
Similarly, six months ago, 38 percent of respondents expected loan terms to loosen in the next 12 months. That number in the current survey dropped to 14 percent. Meanwhile, in 2015 only 13 percent expected loan terms to tighten while that number has jumped to 33 percent in the current research.