Indeed, the outlook for cap rates has many firms rethinking their strategy. This year, nearly 83 percent of respondents said they expect cap rates to stay flat or even start rising in 2012. Then again, 78 percent said the same thing in last year’s survey, and yet cap rates continued to compress. While forecasting is always difficult, seeing is believing, and many firms have been inspired to restart their development pipelines based on the ever-declining yields in the acquisition market. “The low cap rate environment is really driving people to development,” says Derek Ramsey, CFO of Charleston, S.C.–based Greystar. “And if cap rates stay relatively low, there’s a very wide spread between stabilized yields on cost and acquisition cap rates for core product. The formula for development is very favorable right now.”
Like UDR, Camden Property Trust has been one of the industry’s most active buyers over the past 12 months, closing on more than $700 million for 18 communities from July 2010 to July 2011. Though cap rates remain compressed, the rock-bottom yield on the benchmark 10-year Treasury has allowed many low cap rate deals to pencil out. “With interest rates as low as they’ve been, you can still acquire an asset in the mid–5 percent cap rate range, finance it with good agency debt, and get to a decent levered IRR,” says Dennis Steen, CFO of Houston-based Camden. “So the interest rate environment really helped us accelerate some acquisition activity.” While the agencies remain the quote to beat, many private-sector lenders are growing more competitive. Last year, only 16 percent of survey respondents borrowed from either life insurance companies or conduit lenders. But more than twice that, 39 percent, expect to tap CMBS or life company debt over the next year.
The availability of equity capital has also improved. Nearly 60 percent of respondents believe equity capital is more available now than it was a year ago, and 65 percent expect the market to stay just as healthy, or even improve, in 2012.
