Recent 10 Year Treasury Increase, It's affect on Expected Returns and Cap Rates
Hey guys,
I am curious how much the recent .2% increase (now rate is 1.5%) in the 10 year treasury affect's real estate. So from my understanding it's used along with a risk premium to decide on a cap rate for real estate investors.
So it seems with the increase, investors would be increasing their target cap rates as well on deals. Overall it seems the market is searching for higher cap rates in general than before due to uncertainty of future lease ups, covid, etc.
So why with two things that seem to make cap rates go up (i.e. lowering purchase price, deals becoming cheaper) why are we seeing in specifically NYC people say cap rates are going down? It seems to make sense if you're expecting $20 million for a building and your NOI goes from $1.5 million (7.5% cap rate) to a $1 million (5% cap rate), but can anyone explain how these markets all intertwine? Even if you come down in purchase price to $15 million that still showing a reduction in cap rate.
In this case the rents have gone down due to tenants leaving, maybe renegotiating for a new lease so is this happening and it just isn't in overall office market reports/quality assets are usually steady between certain cap ranges? Because in a recent report for 2020 I'm literally seeing cap rates slightly go up for markets like Manhattan, NYC.
Cap rates take a lot of time to adjust, it doesn’t happen overnight. This probably won’t affect them much, especially because of the huge weight of capital allocated to real estate. For example if one fund doesn’t want to buy at a low cap rate another one will.
Would you want to invest in something that’s going to yield you 1.5%?
All that capital looking for returns greater than 1.5% has to choose somewhere. Institutional real estate happens to offer higher returns while still relatively safe. Plus, with debt where it is today, people can afford to pay more and still generate sufficient returns.
Considering both the bond market and the stock market are falling simultaneously, I'd garner that that capital is moving out of the US, not into US real estate. I.e. There is simply less demand for US debt by foreigners. This will cause borrowing costs to rise which will hurt real estate just like it hurt the stock market today.
Lending spreads will probably tighten and cap rates won’t need to move. Usually it’s spreads that adjust quicker while cap rates are pretty slow to move.
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