What impact have the credit problems had on cap rates in your area?
Blake: Cap rates are up easily 100 basis points except, perhaps, on large class-A facilities.
Cinelli: In past years, buyers were more inclined to buy at rates comparable to the lending rates because they were anticipating higher income based on the pro formas of the properties. Now buyers want a 1 percent to 3 percent return over lenders’ rates, depending on facility performance and cash-flow expectations.
Mendola: Cap rates are a function of mortgage constants and the relative competitive nature in each market. Overall, the cap rates are following the credit spreads of about 75 to 100 basis points higher than six months ago.
Shields: Major lenders are seeing cap rates between 7.75 and 9.5, with increases of about 50 to 75 basis points. This can be attributed to the higher cost of capital, the overall availability (or lack) of funds, and the tightening of underwriting standards. We’re left to wonder to what extent these conditions will continue and how much it will affect cap rates going forward.
These comments from the Northeast about increasing cap rates are consistent with what we hear across the country. Just to show how much this means in terms of value (sale price), a one-point increase in the cap rate from say 7 percent to 8 percent reduces the value by 14.3 percent.