by Calculated Risk on 2/09/2010 02:31:00 PM

From CB Richard Ellis: U.S. Retail Cap Rates

Ending at 9.01%, cap rates were up again. The 35 basis point gain is slightly lower than the last few quarters (43 and 46 b.p.). Rates are now the highest recorded since the Q1 2003 start date of our series.
emphasis added

Click on graph for larger image in new window.

This graph from CBRE shows the retail cap rate since 2003. Note that 2009 is an average annual rate, and the cap rate in Q4 was at 9.01% - the highest since the series started.

Also on retail, Reis recently reported that the strip malls vacancy rate hit 10.6% in Q4, the highest on record (starting in 1991). And rents are falling:

Factoring in months of free rent and the landlord's portion of the cost for interiors, effective rent fell 0.8 percent to $16.75 per square foot, wiping out rent gains over the past nearly four years.

Sharply higher vacancy rates, lower rents, reduced leverage and much higher cap rates - this is what Brian calls the "neutron bomb for RE equity"; destroys CRE investors (and lenders), but leaves the buildings still standing.

Cap Rate: the net operating income divided by the current value (or purchase price). Net operating income excludes depreciation and interest expenses. Say an investor paid $100 thousand in cash for a retail property, the investor would expect to clear $8,710 in cash per year after expenses with an 8.71% cap rate (the $8,710 is before paying income taxes that depend on financing and depreciation).