Commercial Real Estate: Pre-tax yield rates stay steady in 3Q 2019, RERC study finds

RERC, a SitusAMC company, finds that the quarterly changes in required pre-tax yield rates or internal rates of return (IRRs) were 20 basis points (bps) or less for all property types. The IRR increased the most for central business district (CBD) office and student housing. Inves­tors indicated less risk in the retail sector quarter over quarter (QoQ) as all three retail subtypes’ IRRs decreased by 10 bps. Warehouse remained the least risky property type.

This trend is explored in the November 2019 RERC Real Estate Report, “Global Realities.” 

Warehouse’s 3Q 2019 IRR is the lowest rate for the property type since RERC began collecting these data in 1989. Hotel remained the riskiest sector among the property types, as has been the case every quarter since 1991. The IRRs of all property types except hotel have generally remained the same or declined over the past three years. However, hotel IRRs have shot up 120 bps between 2Q 2016 and 3Q 2019. National overall CRE IRRs have remained consistent over the past five years and are among the lowest rates in the 30 years of historical RERC data.

While the overall CRE required going-in cap rate remained the same QoQ (as has been the case for the past year), the majority of property types had slight decreases in going-in rates in 3Q 2019, indicating price increases. Flex, regional mall and apartment led with 20 bps declines. The apartment sector had the lowest going-in rate among the property types, as has mostly been the case every quarter for over 18 years (last quarter, apartment tied with warehouse for the lowest rate).

The required terminal cap rate quarterly trends were mixed among the property types in 3Q 2019. The majority of property type terminal cap rate changes (either positive or negative) were minimal at 10 bps, except for regional mall, power center, R&D and hotel. Of note, despite the narrative that physical retail stores could die out, the terminal cap rate for regional mall and power center declined QoQ by 30 bps and 20 bps, respectively. The apartment sector had the lowest terminal rate, as has been the case every quarter for nearly 11 years. The national overall CRE terminal rate has been relatively stable for the past five years.

Rental growth for all three industrial prop­erty types is expected to increase. In particular, flex sector rental growth is expected to increase 40 bps, the largest increase of all the property types. Only two property types are expected to have a decrease in rental growth – suburban office and student housing. The decrease in rental growth for student housing follows a significant increase (40 bps) from the previous quarter.

Expense growth for the regional mall sector is expected to decrease substantially, a somewhat interesting finding considering the amount of capital and tenant improvements that are often required to re-lease mall space. Hotel had the larg­est increase in expected expense growth – 20 bps.

The RERC Real Estate Report is the commercial real estate industry’s most respected and relied-upon survey-based resource of CRE investment criteria for risk analysis for over 45 years. This quarterly report is packed with a variety of valuation metrics, including cap rates, pre-tax yield/discount rates, and investor insights on the institutional, regional, and 47 major markets. To subscribe to the report, go to or call 319.352.1500.

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