Cap Rate compression coming soon?
Please give your thoughts on cap rate compression. We are now looking at 0% and potentially negative rates in the near future.
[{"id": "fkmbhep", "text": "That would presumably only come with increased demand. I\u2019m not so sure many people are going to want to buy in the short term with this uncertainty.", "replies": [{"id": "fkmbudq", "text": "I am thinking healthcare properties (ideally deep pocket health care tenants) in the 8% range. \n\nHealthcare saw almost no downturn with the last recession\n\nMarket is about to dump, online savings, CD\u2019s bonds, etc will provide no return for the foreseeable future, etc", "replies": [{"id": "fkmcdaz", "text": "What kind of healthcare props? You mean like dr offices or urgent cares?\n\nEdit: why would I get downvoted for this?", "replies": [{"id": "fkmdrmy", "text": "I am a dentist, so dental offices, outpatient clinics (primary care, Orthopedic surgeons, pediatric, etc)", "replies": [], "depth": 4}, {"id": "fkmih7y", "text": "Many hospitals lease tons of locations too.", "replies": [], "depth": 4}], "depth": 3}, {"id": "fkmnosz", "text": "8caps for medical office? No way. Try 4-6.", "replies": [{"id": "fkngd41", "text": "Uuhh depends on your location homie. I\u2019m in a major east coast city and looking at one now for 8. I bought my last one in small town USA for 12% ...", "replies": [{"id": "fknmdzn", "text": "If you\u2019re getting &gt;8 caps then I think we have different definitions of deep pocketed tenants", "replies": [{"id": "fknzsfe", "text": "We definitely do \ud83d\ude02 not big box retail or healthcare. This one is the largest group of orthopaedic surgeons in a major city, but their revenue does not compare to , say, Walmart", "replies": [{"id": "fkohait", "text": "Who is guaranteeing the lease? That still seems like it would be closer to a 6 cap", "replies": [], "depth": 7}], "depth": 6}, {"id": "fkqg499", "text": "You may have different definitions of cap rate as well.", "replies": [{"id": "fkqsbnu", "text": "Something that\u2019s not NOI/sale price?", "replies": [{"id": "fkrdax0", "text": "&gt;NOI/sale price?\n\nWhere are you getting the sale price?", "replies": [{"id": "fkrg6ms", "text": "I don\u2019t under stand your question. If a building with an NOI of $80,000 is selling for $1 million then it is an 8-cap.\n\nIf a building that produces $80,000 is an 8-cap that means it sells for $1 million. \n\nI don\u2019t believe there are any other ways to get a cap rate...", "replies": [{"id": "fkrlyjj", "text": "&gt;  If a building with an NOI of $80,000 is selling for $1 million then it is an 8-cap.\n\nYou are using the sellers asking price to calculate a cap rate.  That is 100% backwards.  True, if you pay his asking price you just created an 8% cap rate comp!  But if similar properties in the same market have sold at a 10% cap rate then you overpaid.  $80,000/$1,000,000=8%.  $80,000/10%=$800,000 market value.  You overpaid $200,000 and the scammer probably has you thinking you will get an 8% \"return\".  Cap rates come from closed sales and then are used to determine the value of the NOI up for sale.  Only a novice will try to calculate a cap rate using an asking price.", "replies": [{"id": "fkrn1cg", "text": "You are mis-interpreting what I am saying.\n\nA cap rate is a mathematical formula. There are asking cap rates and there are actual cap rates. My point is that there is only one way to do that math\n\nIn terms of this thread: I haven\u2019t see a medical building in a major city occupied by a well capitalized operator on a long term lease that sells at an 8 cap", "replies": [{"id": "fkrnvtv", "text": "&gt; There are asking cap rates\n\nBut the formula is V=I/r    You don't have the V or the r.   Now you can waste time and be scammed calling the asking price the \"V\" but why, the result is meaningless except to a scammer trying to scam a novice.\nActually an investor NEVER needs to calculate a cap rate.  That is done by professional third party companies on CLOSED sales.", "replies": [{"id": "fkrobfq", "text": "Lol. If I\u2019m looking at a property I do know the Noi and I do know the value they are asking and I do know the price I\u2019m willing to pay. That is based on a cap rate.", "replies": [{"id": "fkrqykr", "text": "&gt; That is based on a cap rate.\n\nLOL, Where did you get that cap rate?", "replies": [{"id": "fkru6v4", "text": "Because I know what a property is worth to me and I know what the NOI is? I\u2019m not understanding your point\n\nIf some one lists a property with $80,000 of NOI for $1 million that means they are asking for an 8 cap. If I offer $888K then I just offered them at a 9 cap. If we close at $941k then we just closed at an 8.5 cap.", "replies": [{"id": "fkruvz9", "text": "&gt; If some one lists a property with $80,000 of NOI for $1 million that means they are asking for an 8 cap. If I offer $888K then I just offered them at a 9 cap. If we close at $941k then we just closed at an 8.5 cap.\n\nAll of that means exactly nothing if all similar properties have sold at a 10 cap.  You would know that if you asked for cap rate comps.  If a seller has $80,000 NOI to sell and I have cap rate comps in the 10% point then I offer him market value of $800,000.  Why would you pay over market? \n\nI'd tell the seller that he will have to find a rich novice to overpay him by $200,000.", "replies": [{"id": "fkrvkps", "text": "Why would I ever invest in anything if I wasn\u2019t already an expert in what similar properties are selling for?\n\nYou are misunderstanding my point. A cap rate is noi/ sale price. That is the only way to do the math, there are many ways to interpret the right cap rate for a property", "replies": [{"id": "fkrxeeb", "text": "&gt;  A cap rate is noi/ sale price. \n\nExactly, but you need a sold price.  You keep saying you know what a property is worth to you and you know what similar properties are selling for.  BUT how do you know what properties have sold for unless you have an analyzed cap rate comp.  If you only have the sold price you don't know if there were below the line adjustments that changed the sales price but not the cap rate.  \nAnd what is the point of calculating a cap rate anyway?  Of what possible use is that other than a waste of time?  Answer those questions and you'll see the folly in your efforts.", "replies": [{"id": "fkryjpy", "text": "Because I have analyzed cap rate comps. I know exactly what every single similar  property has traded for and if I didn\u2019t then I wouldn\u2019t be buying. I would calculate a cap rate so I can compare properties", "replies": [{"id": "fkrz1td", "text": "&gt;Because I have analyzed cap rate comps. I know exactly what every single similar  property has traded for and if I didn\u2019t then I wouldn\u2019t be buying. I would calculate a cap rate so I can compare properties\n\nOK, good that you have cap rate comps.  Where are you getting them?  If you have the cap rate comp then why would you be calculating cap rates.  That is what the cap rate comp is.  \n\nWhat is the comparison process you are using?  All similar properties in the same market should sell for about the same cap rate.  What are you comparing?  Can you walk me through this?", "replies": [{"id": "fks1f2p", "text": "I\u2019m not sure I understand. I know the price, I know the NOI and I know the cap rate. Where am I calculating stuff.\n\nI\u2019m getting my comps from people that did the deals?\n\nYou\u2019re comparing properties based on risk/reward, I\u2019m not sure what you are talking about.", "replies": [{"id": "fks1plm", "text": "&gt; I\u2019m not sure I understand. I know the price,\n\nCap rates are used to value properties.  If you \"know\" the price why are you calculating anything?  You said you were using cap rates to \"compare\" properties.  What exactly is this comparison process?", "replies": [{"id": "fksskx2", "text": "Because The decision to purchase is based on risk adjusted returns not total $$$", "replies": [{"id": "fkt0ok1", "text": "&gt; Because The decision to purchase is based on risk adjusted returns not total $$$\n\nBut since cap rates are not a \"return\" then you are making decisions based on ignorance!  Seriously, all a cap rate tells you is how much you are paying per dollar of possible NOI.", "replies": [{"id": "fktysem", "text": "Exactly my point!!!!!!!!! The cap rate tells you how much am I paying per dollar of NOI\n\nI\u2019m not sure how we went down this rabbit hole. All I am saying is cap rate tells you how much you are paying per dollar of NOI", "replies": [{"id": "fktzeam", "text": "&gt; Exactly my point!!!!!!!!! The cap rate tells you how much am I paying per dollar of NOI\n\nSo how is that a \"return\"?   It is only a valuation metric like I have stated.", "replies": [{"id": "fktzsx6", "text": "What are you talking about? That is exactly what I am saying! A cap rate tells me how much I am paying for NOI.", "replies": [{"id": "fkvchsz", "text": "&gt;A cap rate tells me how much I am paying for NOI.\n\nAnd you are probably being scammed and overpaying.  The value of cap rates is when they tell you what investors have paid for NOI.  Once you know that why would there be any need to try to calculate a cap rate?", "replies": [{"id": "fky6qqi", "text": "This thread is brain dead. What are you guys arguing? Assuming the numbers are actual, the cap rate will tell you your projected returns on whatever sale price you agree on. You can justify a sale price by finding a \"market cap rate\" for similar properties, but your return will be your cash on cash and is dependent on the negotiated price and the financing terms you are able to achieve.", "replies": [{"id": "fkycs8u", "text": "&gt;  the cap rate will tell you your projected returns on whatever sale price you agree on. You can justify a sale price by finding a \"market cap rate\" for similar properties, but your return will be your cash on cash and is dependent on the negotiated price and the financing terms you are able to achieve.\n\nA cap rate and cash on cash are not the same.  A cap rate is a valuation metric and cash on cash is a return metric.  The cap rate will NOT, \" tell you your projected returns on whatever sale price you agree on.\"  It will only tell you how much you paid per possible NOI dollar.  If you value incorrectly (by using cap rate incorrectly like 99% of the internet users do) and overpay you will not see a \"return\" until you make back the money you overpaid. That is what I am arguing about.", "replies": [], "depth": 30}, {"id": "fmxaaf8", "text": "Maybe this will help you understand that cap rates are not a return but a valuation metric.  Surely you have heard of Frank Gallinelli.\n\n[https://www.youtube.com/watch?v=1LbmZZedvMs](https://www.youtube.com/watch?v=1LbmZZedvMs)", "replies": [], "depth": 30}], "depth": 29}], "depth": 28}], "depth": 27}], "depth": 26}], "depth": 25}], "depth": 24}], "depth": 23}], "depth": 22}], "depth": 21}], "depth": 20}], "depth": 19}], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "fmxahu9", "text": "Have you heard of Frank Gallinelli.  He explains cap rates as a valuation tool and ignores asking price.\n\n[https://www.youtube.com/watch?v=1LbmZZedvMs](https://www.youtube.com/watch?v=1LbmZZedvMs)", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fkmcaji", "text": "Compressed cap rates during a recession? Gonna need an ELI5", "replies": [{"id": "fkmdyoz", "text": "Fed drops rates \n\nOnline savings \n\nCD\n\nBONDS \n\nEtc etc - none return any gains any more. \n\nCommercial properties typically have tenants on 5-10-15-20 year terms. Varying credit worthiness, etc but many are credit worthy to weather the storm, and some have personal guarantee of rent \n\nBuy property at 8% cap, over time people are OK with 4% return, your property value just doubled", "replies": [{"id": "fkme3cl", "text": "That logic makes sense but I don\u2019t think it works that way. The overall purchase price for property will not go up or stay the same in a recession.\n\nEdit: why am I getting downvoted? Commercial tenants are going to start missing rent. It doesn\u2019t matter how long their lease is. \n\nBanks are going to tighten underwriting. \n\nPeople are going to get scared. \n\nCash is going to be hard to come by. \n\nWhen tenants can\u2019t pay owners default and go bankrupt. Even more go up for sale with less people who can get financing out together to buy them. \n\nPeople selling will out number people willing and able to buy. \n\nAm I missing something here? I\u2019m seeing DEALS FALL APART THIS WEEK.", "replies": [{"id": "fkmfrma", "text": "What?", "replies": [{"id": "fkmggtc", "text": "Our hotels and commercial properties are going to be worth less money very soon.", "replies": [{"id": "fkn9hcd", "text": "Hotels yes, what about urgent care centers, and dental clinics? Walmart and grocers that are having a great month? Retail outperforms in a downturn especially the dollar store and autoparts chains. \n\nIf this becomes a prolonged pandemic, what about distribution centers with everyone wanting products delivered right to them?\n\nNext 2 months, yes if you had to sell you'd probably have to take a lower number but commercial real estate was one of the first booms in the economy coming out of the great recession 8-10 years ago.", "replies": [{"id": "fkn9sqo", "text": "Dental?! That\u2019s a luxury good my friend. When times get tough and people can\u2019t make rent it suffers. \n\nSame with retail. College towns that depend on the economy of the college are going to get totally crushed all over the country.\n\nEven assets that outperform the market will still get cheaper. See my edit above.", "replies": [{"id": "fkngju1", "text": "Hey homie dental saw a 0% decrease last recession", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "fknghr6", "text": "hey homie if your tenant is on a 10 year lease and is credit worthy and provided a personal guarantee of rent ... what risk are you talking about", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fkmcidl", "text": "I don\u2019t see any cap rate compression.  I\u2019m thinking they tick a little higher just because of motivated sellers dropping prices. Lots of opportunity with the spreads being at all time highs. One problem, will the banks be lending?", "replies": [{"id": "fkme2tx", "text": "Thanks for input. Good question on banks", "replies": [], "depth": 2}], "depth": 1}, {"id": "fkmg6kw", "text": "**We are now looking at 0% and potentially negative rates in the near future.**\n\n&amp;#x200B;\n\nThere is no such thing as a negative cap rate.  You have been scammed!!\n\n&amp;#x200B;\n\nEDIT:  Can even one of you downvoters show how you get a negative cap rate?  Yes, that is a challenge that not one of you will take and that is the problem with any RE thread.  Too many scammers and novice wannabees that have bought the Kool-ade.", "replies": [{"id": "fkmhrvp", "text": "I\u2019m so sorry. Not cap. The fed has cut to 0%. And negative interest rates are certainly possible.", "replies": [{"id": "fkmj09j", "text": "K, but there are people that are being scammed into believing cap rates are a return and there can be a negative cap rate.", "replies": [], "depth": 3}, {"id": "fkml0l4", "text": "Sadly you see posters here trying to make investors believe in negative cap rates.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fkoms3x", "text": "Geez, there are either a lot of scammers here or stupid people that were scammed.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fkn74vi", "text": "I don't think we will see cap rate compression, but we should see NOI depletion.  Tenants will stop paying rent or reduce their rents in the short term.  Banks will need to extend terms to those loans coming due.  It may be a \"kick the can down the road\" for lenders a few months or a year to see where this shakes out.", "replies": [{"id": "fkngkvj", "text": "Agreed here and that is my concern on NOI, but if they are already in a 10 year lease ...", "replies": [], "depth": 2}], "depth": 1}, {"id": "fkngdhb", "text": "Institutional side here for one of the World\u2019s biggest banks: We\u2019re expecting cap rates widening in hotels and student housing for now. The rest remains slightly stable depending on the length of time for virus impact.", "replies": [{"id": "fkngoz2", "text": "Right. Agreed. This is why I\u2019m targeting healthcare and industrial/distribution (I think retail and food services will move out of high rent and into distribution centers and provide delivery of goods)", "replies": [], "depth": 2}], "depth": 1}]