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Capitalization rates move higher or lower for a number of reasons. Supply and demand is one of them. More buyers chasing fewer deals will tend to bid up sale prices, lowering capitalization rates.
That was clearly evident between 2005 and 2007. Another reason capitalization rates move higher or lower is as a response to changes in the cost of capital. Since most apartment sales involve substantial financing, changes in mortgage rates have a significant impact on capitalization rates.
The Capitalization rates and mortgage rates graph below shows the trend over the past 30 years. The capitalization rate is the average actual capitalization rate each quarter. The mortgage rate is the average interest rate buyers secured on their financing. It averages variable, fixed, and seller financing rates.
We don’t have data prior to 1980, but our recollection is that since getting into this industry in 1975, investors have been faced with "negative" financial leverage. That continued until the early 1990’s.
