The median implied capitalization rate for US equity real estate investment trusts continued to creep upward in the third quarter, increasing 10 basis points to 8.3%, in what is the sixth consecutive quarter of expanding implied capitalization rates for the sector.

The rates have reached their highest level since the second quarter of 2010, according to data compiled by S&P Global Market Intelligence. Year over year, the median implied capitalization rate for the REIT sector is up 1.4 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 shrinks in Q3

The office sector continued to trade at the highest median implied capitalization rate, even as the figure dropped 38 basis points in the third quarter to 10.7%. Year over year, the median rate for the sector is up 1.8 percentage points.

Within the office sector, Equity Commonwealth closed the third quarter at the highest implied capitalization rate, at 22.6%. Orion Office REIT Inc. and Brandywine Realty Trust followed at implied capitalization rates of 22.0% and 18.6%, respectively. Two additional office REITs, Empire State Realty Trust Inc. and Kilroy Realty Corp., were also among the REITs trading at the highest implied capitalizations rates, at 16.1% and 14.4%, respectively.

The median implied capitalization rate for the hotel sector also dipped slightly in the third quarter, down 15 basis points to 10.6%.

The industrial and self-storage sectors continued to hold the lowest median implied capitalization rates, at 5.2% and 5.6%, respectively. Compared to the quarter prior, the median rate for industrial REITs is down 86 basis points, while the self-storage median increased 9 basis points.

The shopping center REIT sector logged the largest quarterly increase in its median implied capitalization rate for the third quarter, up 37 basis points to 8.5%. Year over year, the median rate for the sector is up 1.5 percentage points.

Highest implied capitalization rates

Ground lease-oriented Safehold Inc. ended the third quarter with the highest implied capitalization rate of all US equity REITs at 25.2%.

Advertising REIT OUTFRONT Media Inc. placed second, with an implied capitalization rate of 25.0%.

Lowest implied capitalization rates

At the other end of the spectrum, farmland REIT Farmland Partners Inc. closed the recent quarter at the lowest implied capitalization rate, 3.9%.

Manufactured home REIT Equity LifeStyle Properties Inc. traded at the second-lowest implied capitalization rate at 4.3%.

Four industrial REITs — Terreno Realty Corp., Prologis Inc., Rexford Industrial Realty Inc. and EastGroup Properties Inc. — followed next with implied capitalization rates ranging from 4.5% to 4.8%.