Median implied cap rate for US REITs reaches highest level since 2010

The median implied capitalization rate for US equity real estate investment trusts continued to expand in the second quarter of 2023, up another 44 basis points to 8.2%. The increase marked the fifth consecutive quarter of expanding implied capitalization rates and is now at its highest level since 2010, according to data compiled by S&P Global Market Intelligence.

Year over year, the median implied capitalization rate for the sector is up 1.8 percentage points.

Generally, the higher the capitalization rate, the higher the risk and return.

The analysis included all US REITs that trade on the Nasdaq, NYSE or NYSE American with market capitalizations of at least $200 million at each respective quarter-end.

Market Intelligence calculates the implied capitalization rate as property net operating income generated in the last 12 months divided by the REIT's implied real estate value — calculated as market capitalization, including operating partnership units, plus total debt, preferred equity, mezzanine items and noncontrolling interest, less non-real estate assets such as cash, securities or loans.

Office REITs trading at highest implied cap rate

The median implied capitalization rate for office REITs increased by 86 basis points in the second quarter to 11.1%, pushing the sector to once again overtake hotels for the highest median implied capitalization rate. The figure marked a 2.8-percentage-point increase year over year.

Within the office sector, Orion Office REIT Inc. closed the second quarter at the highest implied capitalization rate, 20.6%. Brandywine Realty Trust and Equity Commonwealth placed next with implied capitalization rates of 16.8% and 16.4%, respectively, while Empire State Realty Trust Inc. followed closely behind at 16.2%. At the other end of the sector, Easterly Government Properties Inc. ended the quarter at the lowest implied capitalization rate, 8.0%, followed by Alexandria Real Estate Equities Inc. and Douglas Emmett Inc. at 8.2% and 8.8%, respectively.

Implied capitalization rates within the hotel sector also grew in the second quarter, with the median rate up 33 basis points over the prior quarter to 10.7%. Stronger demand in business group travel helped boost earnings within the sector for the second quarter. Braemar Hotels & Resorts Inc. ended the second quarter at the highest implied capitalization rate of the hotel peer group, at 13.3%, followed by Park Hotels & Resorts Inc., at 12.1%.

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Alternatively, the self-storage and industrial REIT sectors finished the quarter at the lowest median implied capitalization rates, at 5.5% and 6.0%, respectively. The residential sector followed next, at 6.1%.

Highest implied capitalization rates

Advertising REIT OUTFRONT Media Inc. continued to hold the highest implied capitalization rate of all US REITs, at 25.6% for the second quarter.

Orion Office REIT and communications REIT Uniti Group Inc. placed next, with implied capitalization rates of 20.6% and 17.8%, respectively, while Brandywine Realty Trust and Equity Commonwealth rounded out the top five.

Lowest implied capitalization rates

Meanwhile, farmland-focused Farmland Partners Inc. traded at the lowest implied capitalization rate at the end of the second quarter, at 4.0%, followed by manufactured home REIT Equity LifeStyle Properties Inc.

Three industrial REITs — Rexford Industrial Realty Inc., Prologis Inc. and Terreno Realty Corp. — placed next.