Cap rates for commercial real estate have compressed to historic lows in many markets. Investors must adapt strategies to maintain attractive returns in this environment.
Why Cap Rates Matter
Cap rate (net operating income / property value) provides quick valuation metric. Lower cap rates mean higher prices relative to income. Class A multifamily cap rates in primary markets compressed to 4-5%.
Causes of Compression
Institutional capital flooding into real estate seeking yield. Alternative investments (bonds, stocks) offer low returns. Real estate's income stability attracts conservative investors willing to accept lower yields.
Strategies for Higher Returns
Target secondary markets with 7-9% cap rates. Value-add opportunities adding income through improvements. Leverage amplifies returns but increases risk. Consider riskier property types (office conversion, development) for higher yields.