Here's a snapshot of CAP rates in Oklahoma City compared to the national average in key market segments:
With the exception of the retail sector, Oklahoma City's CAP rates outpace the national averages. Furthermore, except for retail, interest rates are lower than the average CAP rates. This presents a favorable scenario for industrial and office sectors, as there's a positive spread between interest rates and CAP rates. However, the close alignment of interest rates and CAP rates in retail raises questions about the implications for the retail market in Oklahoma City.
Implications of Similar Interest and CAP Rates: When interest rates and CAP rates are closely aligned, several considerations come into play:
1. Risk and Return: A near-equal CAP rate and interest rate might suggest a perception of low risk in the property, driven by stable markets, robust tenant leases, or low operating expenses.
2. Market Conditions: In specific markets or economic conditions, it's not uncommon for interest rates and CAP rates to be closely aligned. This may not necessarily be a cause for concern if it's consistent across the market.
3. Financing Costs: A close match between interest rates and CAP rates can impact cash flow, making it challenging for investors to generate significant positive cash flow after covering financing costs and other obligations.
4. Potential for Appreciation: Properties with similar CAP and interest rates may rely more on appreciation than immediate income generation, impacting the potential for long-term returns.
5. Market Dynamics: Understanding the demand and supply dynamics in the real estate market is crucial. High demand and limited supply may contribute to lower CAP rates.
Beyond CAP Rates: Other Tools for Real Estate Investors
While CAP rates are crucial, investors are increasingly turning to additional metrics to assess real estate investments. Some of these tools include:
· Cash-on-Cash Return: Considers both debt service and initial equity to determine the annual return from each invested dollar.
· Payback Period: Indicates how long it takes to recoup the initial investment.
· IRR (Internal Rate of Return): Assesses the profitability of an investment, factoring in the time value of money.
· CAP Rate Spread: Represents the difference between the 10-year Treasury note's interest rate and CAP rates.
Understanding these metrics alongside CAP rates provides a more comprehensive view, enabling investors to make well-informed decisions aligned with their specific criteria. Each investor may prioritize different factors when evaluating investments, and these tools offer valuable insights into the financial health and potential returns of a commercial property.