With expected capitalization rates rising in 2024….. property values?

RESULTING VALUES

Fitch Ratings anticipates higher capitalization rates for various property types in 2024, except for industrial properties, as part of their market assessment.

Capitalization rates, which reflect property returns, often signal levels of risk and property value. Lower rates typically indicate lower risk and higher property values, whereas higher rates imply greater risk and potentially lower property values.

Fitch’s projected capitalization rate for industrial properties, to be used in evaluating U.S. and Canadian multiborrower CMBS deals, is set at 4.842, a slight decrease from the 2023 rate of 4.988.

The most significant increase in assumptions for 2024 is seen in the hotel sector, with a rate of 7.112, up from 6.655 in 2023, representing a 6.9% rise. For multifamily properties, the 2024 assumption rate is 4.682, up from 4.586; for office spaces, it’s 5.675, up from 5.525; and for retail properties, it’s 6.514, up from 6.235.

Fitch introduced the concept of market cap rate assumptions to acknowledge that property value should increasingly depend on market cap rates as loans approach maturity, as outlined by the credit-rating firm.

The rise in cap rates across CMBS deals is attributed to higher interest rates, in addition to broader macroeconomic challenges and strains in the banking sector. These factors collectively contribute to a potential increase in loan defaults.

Fitch plans to update these figures annually, ensuring they reflect changing market dynamics. In summary, Fitch’s 2024 projections suggest varying capitalization rate trends across property types, with potential implications for property values and loan performance.