1998 Annual Cincinnati Metro Area Capitalization Rate Survey

Introduction: A capitalization rate is an estimate of current yields (net operating income divided by value) required by various property types (shown on the table provided). Results were compiled by surveying Greater Cincinnati Real Estate professionals - whose expertise include lender/mortgage brokers, appraisers, real estate brokers, consultants, attorneys, one developer, and one property manager. The results provided are averages. They should not be used to evaluate specific property values without adjustments - tenant quality, lease contracts, location and structure quality. These adjustments are relative to appropriate submarkets where a subject property competes. The most important information presented in this survey is a caption of property value trends over the last ten years. Again these results should be taken as an average and should not be used to value a specific subject property.

Results of 1998 Survey: According to the real estate professionals who responded to this survey, the market looks very promising for all property types analyzed. The average cap rate was lower in all real estate sectors compared to 1997. One primary reason for this, as stated by a large number of respondents, is the increasing presence of REIT's in the market. REIT presence and their huge amounts of capital available are driving rates down in virtually all real estate sectors. The greatest increase in market strength is expected to occur in the industrial sector, especially older, large-scale warehouses. A limited supply of developed sites, as well as economic incentives from states and communities, are reasons cited for the increase in value of existing high-quality warehouse space. Interestingly, office market cap rates in the CBD again fell below that in the suburbs in contrast to 1997. The largest growth of new office buildings is going on in the suburbs, with little new office space being constructed in the CBD. In the retail industry, the 1997-98 "shakeout" was not catastrophic. Mergers dominated and, in some areas, newer retailers replaced older ones but nothing drastic occurred. 1998 should be very solid as the average cap rate decreased about a half percent across the real estate sector - including newer large regional malls, newer large strip malls, new small strips, and older stable strips.

Residential rental rates are stable and increasing slightly in some markets. The supply of residential, multifamily housing is also increasing because of available capital.

General Comments & Greatest Concerns:

  • "The presence of REIT's in all real estate sectors."

  • "Possible vacancies in Big Box (retailers) caused by consolidation and failures."

  • "Overbuilding of Big Box retailers."

  • "Lack of multi-family zoned land for new development will drive up existing rents."

  • "REIT's are almost monopolizing the industry."

  • "Low unemployment rate will fuel inflation."

  • "Competition continues between Northern Kentucky and city at the detriment of both."

  • "Effect of REIT's buying and developing in our markets at the expense of smaller, private developers and lenders/mortgage bankers."

  • "REIT's will continue to purchase the remaining 'A' properties and start to purchase many more 'B' properties."

  • "New spec construction will continue in suburbs."
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