Investors considering an acquisition always ask about the cap rate, the estimated rate of return on the property. But that calculation has never varied so much, according to Colleen Blumenthal, chief operating officer at HealthTrust LLC, a Sarasota-based firm that provides property appraisals and valuations.
“There’s a wide spectrum of risk right now,” said Blumenthal, who will lead a panel of industry pros in a discussion at the 2025 NIC Spring Conference on the complicated dynamics impacting today’s cap rates. “We’ve never had a market before where the cap rate is determined by so many different factors.”
While cap rates traditionally have been fairly predictable, brokers and investors say cap rates, especially those on less desirable projects, don’t make sense anymore. Cap rates today depend on who’s buying the property, the lender, the property’s age and location, and performance assumptions. “Every deal is different,” said Blumenthal. “There is no one answer.”
Blumenthal recently previewed what attendees can expect to take away from the wide-ranging, in-depth session in San Diego. Here are some of the factors impacting cap rates that will be explored:
Obsolete buildings. Communities built 25 years ago typically have several challenges. One example is too many studio apartments. The assumption has been that those properties can fill the needs of middle-income seniors, the so-called “Forgotten Middle,” first identified by NIC in 2019. “I’m not sure that’s true,” said Blumenthal. “Studio apartments are not popular.” She’s noticed in some markets that people still won’t lease the units even with very low rents.
Submarket trouble. Certain submarkets have specific problems. For example, New York City has had seven buildings open over the last few years. For a variety of reasons, mostly related to the pandemic, the buildings that opened more recently have had a better initial lease-up than the older buildings. But none of the buildings are doing as well as expected. “That will be cured with time,” said Blumenthal. “But no one is coming out as well off as they had hoped.”
Interest rates. The capital markets have been rocky since the Federal Reserve started increasing rates in early 2022. Deals began to fall apart later that year because not all the interest rate hikes had been factored into the pricing. Blumenthal doesn’t expect interest rates to go much lower than they are now. But cap rates will decline on stabilized, new properties with good operators. “The supply of desirable product is smaller than the demand,” she said.
Failure to thrive. Newer buildings that haven’t filled are subject to high cap rates. One newer building traded at a cap rate close to 15%. The lender pushed the sale because the buyer had the ability to close the deal. “Buyers with cash are doing fine,” said Blumenthal.
Cap rate creep. For 30 years, skilled nursing cap rates were 12-14%. But cap rates are creeping up for skilled nursing properties. Mom and pop operators, exhausted from the pandemic, are cashing out. Operators need command of healthcare data to show they can provide good outcomes. Sophisticated operators with cash are buying skilled properties.
Blumenthal noted that the panelists in the upcoming 2025 NIC Spring Conference session represent a broad perspective of private, public and workout firms as well as a broker. “The session will be very spontaneous and worth your time,” said Blumenthal. “It won’t be your grandfather’s valuation panel discussion.”