CRE Cap Rates Lower than Estimated

Cap rates are down much lower than most analysts estimate, according to Paul Curbo, portfolio manager with Invesco.

Curbo used the apartment sector as one example and said his company has data that suggest cap rates are in the 5 percent range for major markets. As a result he estimates that cap rates are actually below 4 percent "in some cases on the West Coast."

Curbo said those low cap rates are beneficial to an apartment REIT such as Avalon Bay Communities Inc. (NYSE: AVB) that has a significant development pipeline.

"We think it's a tremendous amount of value creation that analysts are not really including in their estimates, because they are using cap rates that are a little bit higher than where we are today," he said.

When it comes to the most improved fundamentals, Curbo said the office sector, especially in the San Francisco Bay Area, has been one of the strongest sectors. He said this is particularly true in the markets where buildings house Internet and social media companies. Those rents are up 20 percent in the past year and 50 percent since the market trough of 2009.

Curbo said he's seeing "tremendous growth" in that area. He added that companies like Kilroy Realty Corp. (NYSE: KRC) that have a growing presence in the Bay Area are witnessing same store net operating income growth in the last year of approximately 8 percent.

With market environments constantly changing, Curbo said Invesco would like to create a portfolio of companies that could withstand a downturn or capital markets disruption to help protect investors' capital.

"We also have a part of our business and part of our funds that actually invest across the capital structure," Curbo said, "so not only REIT equities, but REIT preferreds, corporate debt and commercial-backed securities."

By investing through this combination of equity and debt, Curbo said there are times where it may be a more volatile environment and investors can invest higher up in the capital structure. He said this would provide more security and less volatility concern in that type of environment.