Cap rate expectations

[Steve G.]

Cap rates have compressed over time. Locally in the Chicago suburban market, a 6% cap rate is common and to be expected. With rising interest rates, I've heard push back that cap rates don't make sense and deals aren't "good", especially if there isn't a big value add opportunity. For those in growth mode, how do you counter the cap rate concern?

[Brian Burke]

Cap rates in the 6% range are common all around the country. That said, cap rate isn’t a measure of deal quality. Cap rate is a fairly useless measurement in deciding how much to pay for a property or how well it will perform.  The only real use for cap rate is to estimate how much you can sell the property for when you go to sell one day.

That’s not to say that the threat of cap rate decompression isn’t real—it is. When we buy we plan our exit caps to be higher than today’s prevailing cap rates to account for that decompression.