The mean cap rate, calculated on a dollar-weighted basis by quarter and illustrated by the dark blue line in the chart, declined by 20 basis points during the first quarter of 2015 to 6.0%. If we look at the 12-month rolling cap rate, shown as the red line in the graph, it declined by 10 basis points to 6.3%. Clearly, both of these are post-recession lows and these low cap rates are increasingly causing people to use the “b” word, bubble. While not outright calling the current market environment a bubble, people are at least starting to ask as to whether or not the current environment should be classified as such. We could spend a lot of time discussing this topic so we'll start here and continue on this topic in coming quarters.
The first way I’d like to address this question is in its historical context. In order to do that, we calculated the mean 12-month rolling cap rate over the last ten years which is shown in the graph as the dashed light-blue line. We use the 12-month rolling cap rate because, as I have discussed numerous times in the past, the in-quarter mean cap rate can be quite volatile contingent upon which properties actually traded during a given quarter. As we can see, the current 12-month rolling cap rate is roughly 30 basis points below the mean 12-month rolling cap rate since 2005 to the present. 30 basis points is not such a modest difference, but it is not unprecedented either. Given that we are comparing to a mean, there have clearly been periods in the past when the 12-month rolling cap rate was below the mean. But what about the current mean cap rate, down noticeably over the last few quarters and now lurking around 6%? Of course the usual caveat of selection bias applies, but even that 6.0% cap rate is not without precedent. There have been quarters in the past when the mean cap was at or near this level, and not even during the most bubblicious days before the downturn. Therefore, if we are going to use historical cap rates as a guide to bubbles, it does not yet look like we are seeing one in the apartment sector.
Are there any signs of a bubble in the office market? Read More