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Cap rate comparisons

In 2019, the CCAO considered multiple third-party sources in assigning cap rates to different kinds
of properties. Our strong preference is to have many recent public transactions that indicate market
valuation levels for each property subclass, just as we do for single-family homes. With commercial
properties, the more typical situation is that there are fewer transactions, over a longer period, with
more heterogeneity among the properties, with some key indicators (such as operating income,
and thus the cap rate) not public. Third-party data thus is invaluable in arriving at cap rates to use
in our valuations.

Here, we show two kinds of sources for capitalization rates in these charts: capital market
sources and real estate industry surveys.

Capital market sources come from money changing hands in public market securities
transactions. They incorporate new information and conditions frequently, even when the
market for individual real estate properties is disrupted. In these charts we show:

(1) a stock market indicator through cap rates implied in publicly traded Real Estate
Investment Trusts, which shows valuation levels for higher quality properties across
the US as a whole (NAREIT implied cap rates) and

(2) a bond market indicator through cap rates used in valuing the collateral of Illinois
mortgages in Commercial Mortgage Backed Securities (Bloomberg CMBS Illinois).

Real estate industry surveys provide quotations on many different types and classes of
commercial property. This includes the data we have published here from Costar, CBRE,
and Real Capital Analytics.

There are other equally valuable cap rate quotes published by, among others, Cushman &
Wakefield, JLL, and Moody’s/REIS. Providers use different methodologies in providing their
quotations, often driven by their proprietary access to information about properties sold or on sale.
You will notice some of these quotations are very stable, suggesting infrequent transactions, or
approximation, or both. These sources have the advantage of being closely focused.

We think it’s useful to publish all of these so that you can see the evolution of these indicators over
time and see how they historically relate to one another. If one series is disrupted or unavailable,
we can make some reasonable inferences if some of the other sources are still available.

Given that some of these sources are updated frequently, we also think they are useful in helping
investors gauge the range we might consider in assigning cap rates to properties that we have not
yet assessed.

CCAO’s Cap Rates

The cap rates we show here for CCAO reflect the range of the lowest cap rates we used in each
township, from lowest starting point to highest starting point. In each township, we adjust our cap
rates higher for lower quality properties.

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