Cap Rates And Reality

There appears to be a feeding frenzy on where cap rates should be, and the frenzy is only taking them lower.

Did you read about the fully stabilized assisted living community that sold for a 3.5% cap rate on first year numbers? You didn’t? April fools, neither did I. But don’t be surprised if it happens given the way the market is going. Two months ago, while attending a seniors housing conference, we heard a rather matter-of-fact statement that cap rates for “A” properties were in the range of 5.5% to 6.0%, and “B” properties were in the broad 6% range. While our annual statistics do not bear this out, we do know that there are transactions done with cap rates between 5% and 6%, with a sub-5% deal once in a while. Nothing was said about the quality level of those properties that sold for 7% and higher cap rates. And there are still a lot of transactions that sell at 7% and 8% cap rates, with mixed quality levels. Still, it appears that the top deals, or the most talked about deals with the lowest cap rates, are setting the tone for where cap rate levels should be. This is great for sellers, and makes for a very competitive bidding process, but while at the NIC conference in San Diego this week, we are going to explore what is really going on, all off the record, of course.


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