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Gauging how commercial real estate prices are faring is difficult during periods of volatility and limited liquidity. However, CBRE Econometric Advisors recently explored four alternative approaches to estimating property yields:

• The Spread-Implied Cap Rate adds the average historical spread of cap rates over the 10-year Treasury to the current property yield.
• The Fair Value Cap Rate estimates property yields based on the Gordon Growth model [risk-free rate + risk premium) - expected income growth].
• The Debt Service Coverage Ratio (DSCR) Implied Cap Rate calculates the yield needed to pencil out a DSCR.
• The REIT-Implied Cap Rate estimates property yields by comparing the relationship between current REIT share prices and a property’s expected income.

Figure 1 shows how each approach compares with traditional appraisal-based cap rate estimates. This comparison suggests the following:

• Office cap rates may have more room to rise.
• The rise in industrial cap rates may have peaked. (Notably, the spread-implied rate is markedly higher than the yields computed using other methodologies, likely due to the recent boom in capital flows into industrial.)
• Current fair-value cap rates are low for retail, implying the sector may enjoy some downward pressure on yields.
• Signals for the multifamily market are mixed, hinting that the outlook for pricing can vary depending upon market and asset selection.