How long before cap rates rise to reflect the interest rate hikes?
I'm a small retail investor.  Thanks to this sub, closed on a Starbucks in 2020 and happy so far.

Looking to make another purchase soon.  The cap rates seem to have compressed even further since 2020.  
I would assume that cap rates would have to rise in response to Fed rising rates.  Maybe wishful thinking?

Who is buying these properties at these rates?  I'm looking for a hands off investment and my broker brought me a ground lease on a national tenant, but the cap rate is below 4%.  When I factor in financing, my CoC return is below 3%.

Is it just institutions purchasing these with favorable financing?
[{"id": "hruv7jn", "text": "They won\u2019t rise.  \n\nAnd you really need to find a niche and operate within that.  I found my commercial niche last November and have bought 60 commercial units in the past 13 months, all of which operate at 22% caps or higher.  I haven\u2019t leveraged the properties yet, but will once I run out of capital", "replies": [{"id": "hruweez", "text": "What? Where are you finding 22% cap rates? I\u2019m in residential LTR. Nowadays, best I find is 7% at purchase and 9-11% stabilized.", "replies": [{"id": "hruxudj", "text": "Not on market.  It\u2019s a niche market I found.  \n\nI buy vacant, distressed commercial buildings off market, put in about 100k every 5,000 sqft to build them out for my niche, and then rent them.", "replies": [{"id": "hruz3bp", "text": "Makes sense. The last year has been an amazing time to get into commercial buildings. I was too afraid of not being able to rent it out so I stuck to residential, which as everyone knows has been on fire. On market, I\u2019m lucky to find 6%. But even off market, everyone knows they can get a pretty penny.\nI\u2019m happy to sit back and wait out a decent deal. 2020 was incredible for me so I\u2019m in no rush.", "replies": [], "depth": 4}, {"id": "hrz5a2q", "text": "Any kind of other hints you can give on your use?   Certainly wouldn\u2019t want to compete with you.  Im located in the Midwest and small scale vacant commercial buildings are a dime a dozen.", "replies": [{"id": "hrz8btg", "text": "I\u2019m in the Midwest too for the very same reason lol.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hrxlkxb", "text": "I don\u2019t get the not leveraging until you run out of capital part but otherwise sounds great. If you\u2019re rehabbing and successfully leasing why aren\u2019t you slapping some debt on them?", "replies": [{"id": "hrxzoe2", "text": "Because I have too much cash.  \n\nIt makes more sense to use my cash to purchase properties than it does to leave it sitting in my bank account.  When my bank account empties, I\u2019ll refinance my deals to buy more, but I won\u2019t do that until I need to.", "replies": [{"id": "hs23id1", "text": "But you could buy\u2026 even more properties, etc.", "replies": [{"id": "hs2pa6v", "text": "You\u2019re making the incorrect assumption that capital is what is limiting my growth, but it\u2019s not.  It\u2019s deal generation.\n\nI bought 60 units last year with cash.  As soon as I run out of cash, I\u2019ll start leveraging.  Until that happens, it makes absolutely no sense for me to leverage anything.  I would make far less and grow significantly slower if I leveraged my properties now.", "replies": [{"id": "hs2rm27", "text": "I guess I\u2019m just making the assumption that you want to maximize your returns on every dollar invested. But hey I don\u2019t know much at all about what you\u2019re doing TBH.", "replies": [{"id": "hs3r2xg", "text": "I do want to maximize my returns on every dollar invested, but I first need to invest every dollar.  \n\nLeveraging only increases your returns if you don\u2019t have excess cash.  If you have excess cash, you\u2019ll be better off investing your cash first.  \n\nI\u2019ll give you some numbers.  Last year, I bought $3,200,000 worth of property with cash and I get a 20% return on my properties, meaning I net about $640,000/yr from the properties I bought just last year.  \n\nLet\u2019s pretend I have another $3M just sitting in the bank.  With a 7% inflationary rate, I \u201clost\u201d $210,000 on my other $3M that\u2019s just sitting in the bank.\n\nIf I leveraged my properties at 75% LTV, I\u2019d get about a 80% return on my invested cash, which is really good, but I\u2019d only have $800k invested and I\u2019d have 5.4M sitting in the bank.\n\nThis is why I don\u2019t finance my deals.  If you run those numbers, you\u2019d see that I\u2019d net $430,000 if I buy everything with cash.  That\u2019s a $430,000 return on my $6.2M in cash that I have.\n\nIf I financed everything, I\u2019d only make $102,000.  I make literally 1/4th as much.  \n\nCash is not an asset.  My cash is burning a hole in my pocket and the more cash I have, the more I lose to inflation every year.  \n\nI would much rather make 20% on $3.2M than 80% on $800k and have $5.4M losing value in the bank that I can\u2019t do anything with.  \n\nFinancing only makes sense when you don\u2019t have the cash to buy something.  When I get to the point where I can have more property than I have cash, I\u2019ll start refinancing my properties to buy new deals and boost my returns on all fronts.  However, while I still have more cash than I have property, I will always buy properties with cash because I make less if I do anything else", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrv0tx8", "text": "I am in southern California, so our CAP rates are extremely low. We had this discussed a few years back when rates were rising and there was anticipation that CAP rates would increase as well. They never did. Many of the buyer's in the market have cash or are trading out of other assets and can't find anything else to trade into. Logic would tell you that CAP rates would have to increase as rates increase....the market has shown, especially with such limited supply, that CAP rates are staying put....and still declining.", "replies": [], "depth": 1}, {"id": "hrvf470", "text": "Spread between the 10 year and cap rates have compressed, especially for NNNs with corporate guarantees, IG credit and significant term left on the lease. There is a shitton of liquidity in the debt markets which will continue to drive leveraged returns for owners. I wouldn\u2019t expect cap rates to increase that materially - maybe 25-50 bps, all else being equal.", "replies": [{"id": "hrwt1t7", "text": "Agreed.  There's some other things I'd consider.  First, I think the multiple of caps over the 10 year or BBB is more important than the spread.  At a going in cap of 3.5 you're earning more than double the return of a 10 year at 1.5, and that's unlevered.  A few years back, if you were getting a 5 vs a 2.5 10YT and figured that was fine, then the market is still rational today, even if the spread is smaller.\n\nSecond, inflation.  Theoretically, at least, RE is an inflation protected asset.  It depends on how the leases are structured, it depends on when the leases roll, but if you've got CPI increases baked into your leases right now, or are in MF where the roll is yearly, you get to capitalize on inflation real fast.  From that perspective you could actually see cap rates invert vs the 10 year.  A 10 year sold at 4% is only ever going to return 4%, not the case with RE garnering rent increases. I don't consider the inversion scenario particularly likely at the moment, I'm afraid I'm still kind of in the transitory camp, and I think you only see inversion if the market really decides the Fed can't or won't get inflation under control, but it's interesting to think about.    \n\nLastly, don't overestimate the correlation between the 10 year and cap rates.  It's relevant, obviously, but caps move, way, way slower.   Over the very long term the correlation approaches .5, property type dependent, but over the short term, 1 - 3 years, it's pretty close to zero.  If the 10 year were to crash to .5 next month, cap rates would take a while to follow it down.  The correlation is better for BBBs, but not like a ton better.  \n\n\nSo yeah, I'm not expecting a cap rate spike, though they should at least flatten out.", "replies": [{"id": "hrxx3d9", "text": "This is a very helpful way of looking at it.\n\nOne way of approaching investing in IG NNN is looking at it a bond like vehicle, in which case, no problem.  Obviously the only catch with most of the leases I've seen is that while there are rental bumps, they are arbitrary and not linked to CPI or anything.", "replies": [{"id": "hry274l", "text": "Yeah, I'm told that CPI links used to be more common.  This is before my time, but I understand they were popular in the 80s and 90s, but as inflation became less threatening, they became less common.  It's funny, they still showed up a bunch in my training, but I don't have much practical experience with the finer points of lease negotiation, and I suspect the trainer's age had an impact on what I was taught.", "replies": [{"id": "hrz3ziu", "text": "In my niche CRE area escalations used to be tied to CPI.  It then switched to fixed escalations.  The fixed escalations used to be 3% annual or 15% every 5 years.  Then it went to 2% or 10%.  \n\nI think everything has switched to fixed over the years.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i1m6bzd", "text": "I am increasing the odds of a cap rate inversion.  The share of caps that traded below the BBB in MF is going to spike in Q1, and the share of caps trading below the 10 YT will probably at least move above 1%, which kind of counts as a spike.\n\nThe bond market is definitely banking on rate rises, and more aggressive rate rises than the Fed has promised.  Meanwhile RE is still quite liquid, MF is incredibly liquid (as is Industrial) and money is pouring into markets that were for many years non-institutional.  New York and San Fran are basically \"back\" but Dallas and Atlanta are running so far ahead, transaction volume-wise, and buildings are selling like hot cakes.  This makes sense, institutional capital has figured out where the growth is (hur-dur and all that), but it caused such intense compression that I'm thinking virtually nothing in, say, Austin, trades above BBB yields in Multifamily in Q2.  \n\n\nThough in the context of the initial question, I guess I'm still thinking caps are flat.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrwwnta", "text": "I've had a couple good discussions about this topic with appraisers. Their overwhelming response is that interest rate movements filter right into cap rates without any sort of lag or delay. I tend to agree with that statement when rates are going down, buyers get more competitive (usually more than what is actually justified). However, I find that cap rates tend to be stickier (stay where they were) when rates are rising and take a longer time to adjust.", "replies": [], "depth": 1}, {"id": "hrxd387", "text": "I'd recommend looking in different markets to see if you can find better rates.", "replies": [], "depth": 1}, {"id": "hrzrywd", "text": "Issue is too many investors are willing to pay for 4.0-6.0 CAP properties.  Even if interest rates rise, it will not have a significant impact unless rates are 7-9% (which will not happen anytime soon).", "replies": [], "depth": 1}, {"id": "hs0ffu6", "text": "Well, they will rise with the same spread. The risk appetite remains the same.", "replies": [], "depth": 1}, {"id": "htn15fl", "text": "\n.", "replies": [], "depth": 1}]