If 10 YR treasury goes back to 3%, that means 3 cap buyers are screwed?
Wanted to get everyones thoughts on this. It seems like people have short-term memory. At the end of 2018 the 10 yr hit 3%. Nowadays we're seeing cap rates hitting 3%. If we get back to a 3% yield on 10 Yr, lets say in 5 years, wont this slash valuations? Large institutional buyers will put a higher allocation to treasuries as risk is less for the same return, thus causing a decline in prices. I dont think there will be enough rent growth over 5 years to justify the price cut.
In my mind, theoretically yes values would take a haircut. Do the shops actually buying these assets at a 3 cap care? Probably not, they're buying for the cash flow not value creation.
Are they going to be disadvantaged because they're stuck either taking a haircut or accepting below market ROE? Yes. Do they have so much capital to deploy right now that it still makes more sense to dump it into these assets despite that? Also yes.
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Explain plz
Likely what is being discussed is the value extraction that property technology is going to do to property owners. If you make on average $100/month/door in cash flows on your property and tenants begin to demand technology systems that eat away at that cashflow you can quicly get to a point where you are cash flow negative. Now do I think this will happen? Unlikely, but it is something to consider because the demand for tech from renters is only going to grow.
Also proptech firms are going to crush asset owners in terms of ROE most likely.
It will hurt buyers who bought at a 3% cap rate and expected to increase their yield on cost above that, but couldn’t. Additionally, if you buy at a 3% cap but have fixed rate 10 year debt, you’ll also probably be okay, because by the time your debt comes due, inflation will have done its thing and your rents will have increased enough to refi out your loan.
Exactly. You can’t talk rising interest rates and keep rent growth static. Rent growth over the next few years could completely offset any value loss from increasing rates, especially if those assets are fixed rate like you said. In 5 years you should still be able to refi everything out of the deal, unless of course you bought way too high today..
It isn't that simple. If inflation causes a 20% increase in rent over the next 5 years, for simple numbers no increases in costs, the NOI will rise by 30 - 35%. However the impact that a caprate growing from 3 - 4 is significantly more impactful on the valuation.
Numbers:
NOI: 10M
Cap rate: 3.0
Value: $333M
NOI: 13M
Cap rate: 4.0
Value:$$325M
While the value can hold in a situation like this, it is the most ideal situation for this. The additional revenue captured will be partly wiped out by the loss of value putting significant downward pressures on return expectations.
But that's only if you assume a 1.4% 10 year ust today is normal. It's not like the last time 10 year was at 3%, rents were much higher than they are today. The concern is if the Fed stops their buying spree and the 10 year is "corrected" back to normal, which let's say it's 3%, then all those 3% cap core buyers are fucked.
If the 10-year hits 3 that means inflation is going fucking nuts, rents will follow inflation and that 3-cap will no longer be a 3-cap maybe more like a 5 or 6
Yes
It’s a spread game
Yeah, those who are paying those yields do it for the long term CF and by and far with fixed rate debt.
I doubt anyone worth their salt is having their deal economics hinge on exit caps at today’s rates. Speaking from experience, if our development deals don’t ink at 100-150 bps above today’s cap rates, we don’t do it.
Just wait until the treasuries are back at 5%
Is the op’s question essentially asking, in other words, if we are too aggressive in the exit caps investors are underwriting? Thus op is really questioning where rates are going over the next 5 years ?
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