Investors Pay Top Dollar, Cap Rates Continue Falling via National Real Estate Investor

Investors continue to spend big on commercial real estate: Buyers and sellers exchanged $50.3 billion in commercial properties in the U.S. in the first quarter of 2012, according to the latest report from New York City-based data-firm Real Capital Analytics. That’s up 40 percent from the same period last year.

But for the recovery in sales to keep growing, property investors will need to look beyond the safest deals in the strongest markets. “The momentum has slowed,” says Dan Fasulo, managing director for Real Capital. That’s because there are only so many class-A properties located in gateway cities such as New York and Washington, D.C. for investors to buy. “There is a lack of supply on the market,” Fasulo says.

Investors have pushed the prices for these top properties high above the rest of the market. Average capitalization rates, which express operating income as a percentage of the sales price, fell to 5.4 percent for office properties Manhattan in the first quarter, compared to an average cap rate of 6.8 percent for class-A office properties in the suburbs of major metro areas. That represents a huge difference in price. “Everyone was saying this last year, but the trend has become so much more extreme,” says Fasulo. “Cap rates are still falling in Manhattan.”

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