Median implied capitalization rate for US REITs dips in Q1

The median implied capitalization rate for US equity real estate investment trusts dropped 20 basis points in the first quarter of 2024 to 8.1%, following seven consecutive quarters of expanding implied capitalization rates for the sector, according to an analysis by S&P Global Market Intelligence.

Higher capitalization rates generally indicate higher risk and higher returns. Capitalization rates had increased over much of the last two years as significant increases in interest rates contributed to heightened concerns over the asset class. The Federal Reserve is still expected to cut interest rates in the second half of 2024 but the expectation for rate cuts has declined notably in recent months.

While implied capitalization rates for the REIT sector fell in the first quarter, the median implied cap rate for the sector remains 37 basis points higher than a year earlier.

The analysis included all US REITs that trade on the Nasdaq, NYSE or NYSE American with market capitalizations of at least $200 million at each respective quarter-end and can offer insight into how the Street is valuing different property sectors. While valuations within the portfolio of publicly traded REITs might not match all privately owned properties, the public markets can oftentimes serve as a leading indicator for potential future property pricing. That insight is particularly helpful when there is little price discovery in the market due to a lack of transactions.

Market Intelligence calculates the implied capitalization rate as property net operating income generated in the last 12 months divided by the REIT's implied real estate value — calculated as market capitalization, including operating partnership units, plus total debt, preferred equity, mezzanine items and noncontrolling interest, less non-real estate assets such as cash, securities or loans.

Office REITs continue to trade at highest implied cap rates

The office sector continued to trade at the highest median implied capitalization rate. The sector closed the first quarter at a median implied capitalization rate of 10.5%, down 1.9 percentage points from the quarter prior and up 27 basis points year over year.

Among the 10 REITs trading at the largest implied capitalization rates, six were from the office sector. Brandywine Realty Trust traded at the second-highest rate of all US REITs, at 19.2%, while Net Lease Office Properties followed closely behind with 19.1%. The other office REITs that closed the quarter in the top 10 included Franklin Street Properties Corp., Piedmont Office Realty Trust Inc., Empire State Realty Trust Inc. and Kilroy Realty Corp.

The median implied capitalization rate for the regional mall sector also dropped 1.9 percentage points from the quarter prior, closing the quarter at 7.5%. Within the mall sector, Simon Property Group Inc. closed the first quarter at an implied capitalization rate of 6.3%, while Macerich Co. ended the quarter at 8.7%.

The datacenter sector's median implied capitalization rate dropped 39 basis points quarter over quarter to 7.1%. Year over year, the rate for the datacenter sector is down 73 basis points.

– Download the underlying data for this Data Dispatch article. – Download the US Real Estate Field Calculations template that includes a line-by-line breakout of the implied capitalization rate calculation. – For further capitalization rate analysis, try the US REIT Capitalization Rate Excel template.

The rate for the hotel sector was flat quarter over quarter, at 10.2%.

The industrial and self-storage REITs continued to trade at the lowest implied capitalization rates. The rate for the self-storage sector grew to 5.9% in the first quarter, a 32-basis-point increase over the quarter prior and a 40-basis-point expansion year over year. The rate for the industrial sector was largely flat, closing the quarter at 5.8%.

Highest implied capitalization rates

Advertising REIT OUTFRONT Media Inc. traded at the highest implied capitalization rate among all US REITs above $200 million market capitalization at quarter-end, at 22.0%.

Office REITs Brandywine Realty Trust and Net Lease Office Properties ranked second and third with implied capitalization rates of 19.2% and 19.1%, respectively. Communications REIT Uniti Group Inc. traded at the fourth-highest rate, at 17.5%.

Lowest implied capitalization rates

Farmland REIT Farmland Partners Inc. traded at the lowest implied capitalization rate among the US REIT sector, at 3.9%.

Industrial REIT Prologis Inc. and manufactured home REIT Equity LifeStyle Properties Inc. closed the first quarter at the next-lowest implied capitalization rates, at 4.2% and 4.4%, respectively.

Four other industrial REITs placed among the top 10 REITs trading at the lowest implied capitalization rates. Terreno Realty Corp. closed the quarter at a rate of 4.5%, while Rexford Industrial Realty Inc. and EastGroup Properties Inc. traded at rates of 4.7% and 4.8%, respectively. First Industrial Realty Trust Inc. ended the quarter at 5.1%.