For income producing commercial property, Capitalization (Cap) Rates determine property values, a function of the dollars generated by the property and thus the ROI. These cap rates are influenced by a ton of different factors including type of investment, location, potential for increasing cash flow. The lower the cap rate the more valuable the property.
To me, in certain ways, determining cap rates is an art form. At the end of the day, it’s what a purchaser will pay.
I attended the OAC this week in Dallas where some discussions hovered around influences on cap rates and where they might headed. While no one can say with certainty what cap rates will do, these were the constant themes I heard:
- Although the 10-year treasuries are expected to rise later this year, the world sees the US as a safe haven for money and a hedge for inflation. This should add some pressure to keep cap rates lower, tightening the spread between real estate cap rate and the 10-year treasury bond rates.
- While we think our 10-year bond rate is low at 2%, we are middle of the pack. Our rate is 6x higher than Germany’s. That is another reason to invest in the US.
- There is not as much new product being generated in the retail sector as in years past. There are more equity dollars chasing a smaller supply of deals.
- In most real estate markets, our fundamentals remain solid.
- There is greater investment interest in the secondary and tertiary markets than in years past. This is better for smaller cities and towns.
All positive for now, I will say…
