1999 Annual Cincinnati Metro Area Capitalization Rate Survey

Introduction: A capitalization rate is an estimate of the current yield (net operating income divided by value) required by various property types. It is not a rate of return on investment (IRR) because it does not explicitly consider projected future income, or changes in property value over time. However, the ratio is a useful measure of value, if it is derived from information about what investors have been paying for comparable properties. The table provided offers a summary of property value trends over the last 11 years. The results have been compiled by surveying real estate professionals in the Cincinnati Metro area, including developers, brokers, leasing reps, property managers, appraisers, consultants, and mortgage lenders. The results provided are averages. They should not be used to determine the value of a specific property without adjustments for tenants quality, lease contracts, location and structure quality relative to the appropriate submarket in which a subject property competes.

Results of 1999 Survey: Increasing cap rates are the trend this year for several real estate sectors in the Cincinnati market, including all aspects of retail and residential and much of the industrial and office sectors. Lower expected growth and a decrease in value accompany these high rates. Professionals are concerned with the impact of overbuilding in virtually all areas, especially in a tight debt market. Rends are expected to decrease due to continued construction, along with an economic downturn creating less demand in some areas.

Deals will be fewer and more difficult to find. Overvaluation of the stock market is fueling local market fears, and credit availability, as well as tenant strength, is an issue. Many traditional players have become "cash poor" and continued credit market volatility is contributing to a further tightening from local lenders. In the past, REIT presence was a concern. Many feared they were monopolizing the industry. REITS have recently stopped chasing many products, with the impact of their retreat still uncertain.

General Comments and Greatest Concerns:

  • "Caution still prevails in the retail sector."

  • "Cincinnati's industrial sector remains very strong and only gets better due to the central hubs in the Midwest."

  • "City council continues to bicker and pursue special interests while Northern Kentucky swoops all the corporate business away under the guise of regionalism."

  • "Economy will be less stable, but interest rates will remain low, giving an opportunity for vibrant property sales."

  • "Concern of little inventory for sale through 1999 in the residential sector."

  • "Oversaturation in all aspects of commercial development."

  • "Too much speculative building."

  • "Nervousness in financial markets resulting in a 'credit crunch'."

  • "Impact of the retreat of REITS in many sectors."

  • "REITS still dominant in large scale industrial sector."

  • "Credit is a pressing issue, particularly with retail."

  • "Older office properties are beginning to lose value due to new product on-line."

  • "City is impediment rather than partner in development."

  • "Concerns for overall economy tends to make tenants cautious about undertaking large improvements."

  • "Lack of broker/lender to consumer communication on ways to improve current status."

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