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Understanding Cap Rate Trends in New England


Whether you’re deciding how to manage an existing commercial property, or considering a new investment, capitalization rates- commonly known as “cap rates”- are a common and useful tool for determining the next best move. Cap rates represent the relationship between the value of a commercial income property and how much income it produces.

Cap rates are often a good indication of the amount of risk associated with an investment. Lower rates are generally associated with lower risk, reliably- producing income properties, brought on by an increase in demand. On the other hand, higher cap rates mean riskier properties. Properties with high cap rates tend to have reduced value, but can offer potential to motivated investors. Cap rates tend to vary based on the commercial property type (i.e. retail, industrial, special use) and among geographical locations, but most cap rates range somewhere between 5% (in a very robust real estate market) to 15% (in a lagging market).

What Are Cap Rate Trends?

Cap rate trends are historical data of cap rates of different commercial property types in different locations. In illustrating the evolution of cap rates over a period of months, years, or decades, cap rate trends can offer a quick insight into the expected direction of the market when considered in context of larger economic factors.

Cap rate trends tend to be geographically specific. Cap rate trends in New England, encompassing real estate in states like Connecticut, Massachusetts, New Hampshire, Maine, and New York, can be drastically different than cap rate trends in rapidly expanding western cities, like Phoenix, because of larger economic differences and trends in the regions. Therefore, in analyzing cap rates, be sure to only consider empirical data from comparable properties in local markets.

What is the Current Trend in New England?

Over the past few years, New England has generally seen decreasing cap rates due to a strengthening real estate market. A historic low was reached in 2015, but this momentum began to wane as cap rates fell at a slower place during 2016. Cap rates began to increase towards the end of 2016, and this trend has so-far continued into the first quarter of 2017. The current expectation is that these rises will continue, albeit at a modest rate.

So What Does The Current New England Cap Rate Trend Mean?

There’s no doubt that cap rates are increasing – but what does this mean for you as a commercial property owner or investor? It suggests a higher volume of properties may continue to be sold in New England at lower prices, and shows property values may be stabilizing after the market recovery of the past few years. Current cap rate trends show now is a great time for first-time investors to consider breaking into the New England real estate market.

So when you’re looking to invest in, manage, or expand your real estate portfolio, incorporating cap rate trends into your economic plan is a great way to make sure you are identifying the best properties making the most of your property’s potential returns.

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