CAP Rate Predictions and Consession Syndrome
Cap Rates for the 54 largest market for apartments are predicted to rise from 7.5% today to 8.05% in 3Q of 2011, according to the March issues of SOURCE – PPR, a CoStar Company. I find it interesting to see this number and wonder if this is for stable non-distressed assets only. In West Michigan it seems that the cap rates are much higher and though its not one of 54 largerst markets it seems almost all transactions are distressed with high or negative cap rates. As a buyer it seems like many other fundamentals need to be evaluated other than just the cap rate when looking to buy, such as the cash on cash return rate as well as the potential for improvement of the property.
On a different note the CPI hit a low in July 2009 and has been on a steady rise ever since, while rents have been on a slow steady decrease since January 2009. Higher vacancy has contributed to the drop in rents and owners looking to give concessions have dropped the real effective rent they receive. Grand Rapids is experiencing heavy concessions with some companies offering 2 bedrooms for 1 bedroom prices and the usual concession of 1 or 2 months free rent. Its unfortunate that so many owners offer such outrageous concessions because it only seems to add to their problem. They reduce rents by a hundred dollars and when they raise it back up a year later the person moves and the problem just keeps rotating from year to year. I say focus on the true rental rate for the unit type and avoid the concession syndrome for more stable occupancy and more satisfied tenants!
