Commercial Real Estate Finance

From Integra Realty Resources‘ 2013 Viewpoint report, here’s a list of the Top 10 Best-Performing Property Types of 2012, ranked according to average transaction cap rate:

10. CBD Lodging (2012 average cap rate: 8.58%)

  9. Flex Industrial (8.30)

8. Suburban Office (7.91)

7. Industrial (7.75)

6. Neighborhood Strip (7.66)

5. CBD Office (7.65)

4. Community Mall (7.60)

3. Regional Mall (7.28)

2. Suburban Multifamily (6.08)

1. Urban Multifamily (5.91)

 IRR sure loves its data. Even better, just like Jone Lang LaSalle and the late, great Grubb & Ellis, the company likes to share its painstakingly collected numbers with the broader real estate community (which is great for someone like me, who’s always on the hunt for more Top 10 lists). In fact, IRR’s Philadelphia branch is co-sponsoring the (shameless plug) Mid-Atlantic Real Estate White Paper Competition organized by the Philadelphia Real Estate Council.

On the subject of 2012′s average cap rates, IRR’s analysts comment,

…the general rank of property types by capitalization rate remained relatively unchanged from 2011. One exception to this overall trend is… general industrial properties are observed to have compressed inside of rates for suburban office… (IRR Viewpoint 2013, 6-7)

The generally even decrease in cap rates seems to show that, asset by asset, commercial real estate is slowly recovering value. The exception is suburban office properties, which appear to be losing to industrial real estate when it comes to investor demand. This shouldn’t be too much of a surprise. As I’ve discussed before, industrial (read: warehouse) properties have become increasingly valuable in markets near major ports or other shipping hubs (case in point: Central PA).

Suburban office, on the other hand, has been among the worst real estate casualties of the Great Recession (though it received far less attention than single-family, of course). I think this asset type’s under-performance can be attributed to, not only pre-recession over-building, but the general trend of urban consolidation following the economic downturn. The ranking above shows the investor preference for CBD and other centralized real estate–as opposed to more outlying properties.

The exception to that rule is, of course, industrial. By its nature, industrial requires a great deal of space. Properties with a low cost per square foot (in outlying areas) are ideal.

In other words, we have large warehouses in the middle of nowhere selling at lower cap rates than office buildings right outside major cities. Am I the only one who finds this a little strange?

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