2016 Capitalization Rate Expectations

2016 Capitalization Rate Expectations

As an extension of the CCIM Outlook Conference presented by the Miami-Dade/Monroe District of the Florida Chapter of the CCIM Institute, Blazejack and Company undertook an unscientific survey of attendees regarding their expectations regarding real property capitalization rates in 2016.  Simply stated, the capitalization rate in a transaction is the percentage indicated when the net operating income is divided by the sale price.  For instance, if a property that was producing net income of $7,000 per year sold for $100,000, the indicated capitalization rate would be 7.0%.

Our survey was simple:

What do you think will happen with real property capitalization rates in South Florida in 2016?

a. decrease substantially (higher values)
b. decrease slightly
c. not much change
d. increase slightly
e. increase substantially (lower values)

Follow up question – why?

The results:

Survey results 2016

The results reinforce what the speakers had to say about the market(s). Here is a summary of some of the comments cited by survey participants for their opinions:

Among respondents who expect a slight decrease:
• Scarcity of product
• Hot market
• Capital markets appetite for deals produces continued competition

Among respondents who expect cap rates to stay roughly the same:
• Continued demand (multifamily)
• Capital moving from stocks to real estate

Among respondents who expect a slight increase:
• Greater perceived risk generally
• Stock market/global rist
• Saturation (retail)
• Increased global risk
• Inflation
• Interest rates

The PwC/Korpacz Survey has been undertaken quarterly for more than a decade and it is a recognized “ball parking” source for capitalization rate indications – particularly for rates applicable to institutional grade product. The survey provides valuable data on a host of topics, including yield and growth rates as well as retention percentages and TI expectations. Some of the capitalization rate data from their most recent survey follows:

Commercial Cap Rates

Here is how one capitalization rate indication has changed in the response to the great recession and the recovery that has followed. This is the South Florida Office capitalization rate indication.

S FL Cap Rates

Of course, different participants in the real estate market regard capitalization rates from different perspectives. Investors (and lenders) who depend on leverage tend to be more concerned with mortgage interest rates. Here is a simplified mortgage/equity calculation using an interest rate of 4.5% and assuming a loan to value ratio of 65% and a 30 year amortization schedule. The indicated mortgage constant is 6.080%. In this instance we plugged in an equity return of 9%.

Band of Investment

Lenders can use the same assumptions (without the need to make assumptions about the equity position) to determine what minimum capitalization rate will ensure the debt service coverage they seek. Since the great recession traditional lenders have been more focused on credit and cash flow than they have been on collateral. They simply multiply the coverage they seek by the loan to value ratio and they multiply the result by the indicated mortgage constant. Here is the “Bankers Cap Rate” calculation:

Bankers Cap Rate

After holding interest rates at historic lows, the Federal Reserve finally acted to move interest rates up 25 basis points and indicated that further upward movement was to be expected. However, falling oil prices and a global economic slow down seem to be nixing that intent.
Cap rates are great, but in the digital age many more investors (and virtually all institutional investors) are more focused on IRR (internal rate of return) or the yield rate. Yield rates are more explicit than cap rates. Capitalization rates are applied to a single year stabilized net income estimate. Yield rates are used to discount the full slate of income cash flows anticipated from ownership, including the property sale at some future date. Yield rates are suitable for direct comparison to returns anticipated from alternate investment options. Since the pWc Korpacz survey also provides indications of yields sought by investors, we can use the data to examine the spread between yield and cap rates. This provides some indication as to whether there is “cushion” to absorb interest rate increases without a cap rate increase. Here is a graph showing the historic relationship between yield rates (IRR) and cap rates.

S FL Yield and Cap Rates

Since the 1Q2008 survey, the average spread between the average quoted Yield Rate and the average quoted Capitalization Rate has been 1.35%. It has fluctuated between .67% and 2.70%. As of the end of 2015, the spread was 1.15%. So, while there is some cushion for cap rate movement, there is not a lot.

Thanks again for participating in our study. We hope to be able to work with you on your most interesting real estate problems in the coming year.


Miami’s Design District: In Transition

Miami’s Design District is a pocket of commercial properties that comprise a unique “community of design”, generally located between N.E. 36 and 41 Streets and between Biscayne Boulevard and North Miami Avenue.   The vast majority of commercial space within the Design District has traditionally catered to creative businesses including interior design firms, art galleries and studios, media production firms, and furniture retailers.  Over the past eight years, restaurants have also begun to open in this district, providing a night-time entertainment element to the neighborhood that has increased its popularity.  These currently include Michael’s Genuine Food, Buena Vista Bistro, MC Kitchen, Mandolin, Egg & Dart, and Oak Tavern.  The Design District is also home to the Design and Architecture Senior High (DASH), a highly-regarded magnet high school that is part of the Miami-Dade County public school system.

Craig Robins, the majority owner of properties within the Design District, was the driving force for the neighborhood’s recent rejuvenation.  Most recently, he has begun luring high-end, luxury retailers to locations in this neighborhood.  This is part of a large-scale plan to re-make a large central portion of the Design District into an enclave of ultra-luxury shopping, augmented by cafes and tree-shaded plazas.  The targeted area lies between N.E. 38 and 40 Streets, along N.E. 1st Avenue and continuing to the east toward N.E. 2nd Avenue.  It includes more than 540,000 square feet of new construction and redevelopment that is now underway, at a cost of $312 million.  The original plan calls for the creation of Palm Court, a pedestrian retail district along a north/south axis through these city blocks, with underground parking.


Longstanding non-compete clauses for luxury retailers at Bal Harbour Shops have expired, allowing these retailers to look at other locations in Miami-Dade County such as the Village of Merrick Park in Coral Gables and Brickell CityCentre, which is now under development.   The redevelopment of the Design District is part of a partnership between Craig Robins and a Paris-based investment fund that is backed by luxury giant Louis Vuitton Moet Hennessy.  As a result of this collaboration, Louis Vuitton, Christian Louboutin, Christian Dior, Prada, Celine, Hermes and Cartier have already opened stores in the Design District along N.E. 40 Street between N.E. 1st and 2nd Avenues.  Other famous brands such as Fendi, Pucci, De Beers, Marc Jacobs, Zegna, Tom Ford, Burberry have expressed an interest in locating stores in the Design District.  The redevelopment plans also call for two anchor stores such as Bloomingdale’s SOHO concept.



This surge in new luxury retail development is fueled by a growing number of wealthy visitors and residents that are arriving in Miami, including those from Latin America and Europe with increasing numbers from Asia.  The recovery in Miami’s condo market has been led by luxury high-rise development in prime markets, with many units priced above $1million and marketed to high-wealth foreign buyers.  The region’s luxury profile has been greatly enhanced by events such as Art Basel in Miami Beach, a five-day event that is held each December.  This event attracts more than 260 leading art galleries from across the globe, with works by over 2,000 artists that draws a sophisticated and affluent crowd of visitors to Miami.  Art Basel in Miami Beach is now recognized as the most-prestigious art show in the Western Hemisphere, with functions increasingly centered in the Design District and its adjacent Wynwood Arts District and Midtown Miami.

Peripheral areas of the Design District continue to feature interior furnishing and design showrooms, which currently includes a roster of nearly 50 outlets including Adriana Hoyos, Ann Sacks, Armani/Casa, Baltus, Bisazza, Design Within Reach, Holly Hunt, Fendi Casa, Janus et Cie, Ligne Roset, Jonathan Adler, Luminaire, Monica James, Vitra, Pampanoli, Poliform USA, The Rug Company, Waterworks, Michael Dawkins, and Bobby Berk..  These luxury home furnishing and design brands target an upscale clientele.  With the addition of restaurants and high-end retailers, more of these design showrooms are open to the public during normal business hours, with businesses seeking ground floor locations with direct frontage to the street to attract retail customers as well.

Other plans for the Design District include a high-rise hotel and residential project at N.E. 40 Street & N.E. 1st Avenue, and a continued mix of restaurants and cafes to create a luxury lifestyle shopping “experience” within the Design District.  Construction is feverishly underway in the center of the Design District to accommodate these redevelopment plans, with luxury fashion retailers already appearing along N.E. 40 Street.   This has led to additional speculation as investors have recently paid premium prices for properties in the Design District, before retailers’ sales volumes have shown support for sharply increased rents.   These rents can range from about $30-$60 per square foot at the District’s periphery to a premium rate of $100 per square foot or more along N.E. 40 Street.  These investors are hoping that the critical mass of newly-developed retail and showroom space in the Design District can attract enough shoppers that sales volumes will eventually support the higher rental rates and premium prices paid for investments in this market.

– Jay Mlinar