The median implied capitalization rate for US equity real estate investment trusts inched upward in the fourth quarter of 2023, up 3 basis points to 8.3%. This marked the seventh consecutive quarter of expanding implied capitalization rates for the sector and the highest level since the second quarter of 2010, according to an analysis by S&P Global Market Intelligence.
Year over year, the median implied capitalization rate for the REIT sector is up 1.1 percentage points.
Higher capitalization rates generally indicate higher 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 REIT median cap rate grows to new heights
The median implied capitalization rate for the office sector rose to 11.6% for the fourth quarter, the highest level in the analysis going back to 2000. The figure marked a 91 basis-point-increase over the 10.7% median rate for the third quarter of 2023 and a 2.1 percentage point jump year over year.
Within the office sector, Equity Commonwealth closed the year at the highest implied capitalization rate, at 22.3%. Orion Office REIT Inc. and Brandywine Realty Trust followed closely behind with implied capitalization rates of 22.2% and 18.9%, respectively. Other office REITs among the list of REITs trading at the highest implied capitalization rates included Franklin Street Properties Corp., Empire State Realty Trust Inc. and Piedmont Office Realty Trust Inc.
On the other hand, Easterly Government Properties Inc. closed the fourth quarter at the lowest implied capitalization rate amongst the office REITs, at 8.5%, followed by Alexandria Real Estate Equities Inc. and COPT Defense Properties, both at 8.9%.
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The hotel sector placed second, despite the median implied capitalization rate for the sector dropping 35 basis points in the fourth quarter to 10.2% as of year-end. Year over year, the median rate is up 86 basis points.
The self-storage and industrial sectors continued to trade at the lowest implied capitalization rates, at 5.5% and 5.7%, respectively.
The regional mall sector also logged a notable quarterly increase in its median implied capitalization rate, up 81 basis points to 9.4%. On the other end, the datacenter REITs saw a 58-basis-point drop in their median implied capitalization rate during the quarter to 7.4%.
Highest implied capitalization rates
Ground lease-oriented Safehold Inc. traded at the highest implied capitalization rate among all US REITs above $200 million market capitalization, at 23.8%.
Advertising REIT OUTFRONT Media Inc. ranked second at 23.3%, while Equity Commonwealth rounded out the top three.
Lowest implied capitalization rates
Farmland REIT Farmland Partners Inc. ended the year at the lowest implied capitalization rate, at 3.9%.
Industrial REIT Prologis Inc. and manufactured home REIT Equity LifeStyle Properties Inc. placed second and third, with implied capitalization rates of 4.1% and 4.2%, respectively.
