As real estate investors contend with high-interest debt and soaring prices, some are turning their attention to often-overlooked metro areas in search of higher returns. Nick Gerli, CEO of Reventure Consulting, has identified five markets where investors can potentially find the most attractive capitalization rates (“cap rates”) in the current environment.
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“These are markets where investors can still cash flow in 2024, even with today’s interest rates,” Gerli wrote on X (formerly Twitter).
According to Gerli, Jackson, Mississippi, tops the list with an 8.5% cap rate. New Orleans follows at 7.8%, while Columbia, South Carolina (7.1%), Pittsburgh (7.0%), and El Paso, Texas (6.9%) round out the top five.
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Cap rates, a key metric in commercial real estate, represent the ratio of a property’s net operating income to its market value. Higher cap rates generally indicate greater potential returns but often involve increased risk.
“High cap rate markets are a potentially good place to invest in 2024, as they return more cash flow from Day One and rely less on long-term appreciation,” Gerli noted.
The focus on immediate cash flow could prove attractive to investors wary of speculating on future price appreciation in an uncertain economic climate. By contrast, Gerli pointed out that many markets in California, Washington, and the Mountain West offer cap rates below 4%, a figure some investors might find uninspiring given current borrowing costs, as they may not provide sufficient returns to offset higher borrowing costs.
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However, real estate professionals caution that cap rates alone don’t tell the whole story. “When looking at cap rates, it’s critical to analyze like-kind comparables, such as property type, location, income/expense, quality/condition, and durability,” explains a JPMorgan report issued earlier this year on the metric.
The report also notes that factors like local economic conditions, property-specific characteristics, and broader macroeconomic trends can all influence an investment’s true risk-return profile.
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Using Dallas as an example, Gerli’s analysis illustrated how cap rates can vary within a single metro area. While high-priced suburbs north of downtown offer cap rates of just 1-2%, more transitional neighborhoods boast rates of 6-7% to the south.
“If you’re an investor, understanding the rental and cap rate trends in your city is Paramount to making good investment decisions,” Gerli advised.
As the Federal Reserve signals interest rate cuts in 2024, investors may want to see how cap rates across various markets respond. Lower borrowing costs could compress cap rates in some areas, potentially changing the landscape of investment opportunities.
For now, cities like Jackson and New Orleans are enjoying their moment in the spotlight as potential havens for yield-hungry real estate investors.
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