Interest rates appear to generally outstrip cap rates. Is this a leading indicator of cap rate expansion? Why or why not?
See title. This applies to all assets, but I'm mostly interested on the impact on multifamily (and especially affordable/LIHTC). I've spoken with several brokers and lenders who have indicated that more or less every deal (multifamily) they are looking at is debt service constrained. My read is that this is because the industry has not yet adjusted to the reality of increased rates or accepted the impact that rates will have on purchase prices. I don't think cap rates of \~3.5-5.5% (strong market, multifamily) make sense when agency debt (FNMA/Freddie/HUD) are north of \~6.5-7%. Recent appraisals appear to justify cap rate conclusions on a historical basis and market participant expectation surveys (also heavily influenced by historical performance under low market rates). Given that we have an entire generation of CRE positions that have enjoyed low interest rates their entire career (myself included) I am not confident the MAI crowd or their market participants have accepted that cap rates need to climb in response to rising interest rates. I find myself wondering how this will unwind and what this correction will look like.

I'd welcome anyone to challenge my thinking here or provide additional insight.
[{"id": "iwv9xz5", "text": "Purchase prices will go down. Volume is dying. Underwriters will lead the way - cre is debt heavy thanks to the low rate environment.", "replies": [{"id": "ixm3w6a", "text": "I\u2019m starting to see prices come down. Not nearly enough but it\u2019s staring.", "replies": [{"id": "ixvo710", "text": "Brand new SBUX listings at 5.5 cap and accepting 5.75 with no finance contingencies.  Not saying invest in this\u2026but it\u2019s definitely creeping up.", "replies": [{"id": "ixvoegm", "text": "Where? That\u2019s a solid price. I have sbux as a tenant (placed and built by me). \n\nThey\u2019re NN not NNN but I\u2019m fine with that.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwvacae", "text": "I completely agree, this has been my \u201ctheory\u201d as well. Besides for depreciation, why would I buy a 4% cap when I can get 4.5%, risk free, no work, with treasuries over the next year or two? There should be a risk premium that will likely take another 6-12 months to show. My bet: cap rates up, prices down 2023.", "replies": [{"id": "iww091l", "text": "&gt;, why would I buy a 4% cap when I can get 4.5%, risk free, no work,\n\nYou buy AT a 4% cap rate.  All that means is that you paid $25 for each possible dollar of NOI.  V=i/r  $25=$1/4%.   That is not your \"return\" so it is foolish to compare that to treasuries.", "replies": [{"id": "iww9siu", "text": "Unless tax free state absolute NNN?", "replies": [], "depth": 3}, {"id": "iwwdfag", "text": "Bro, you use that as a quick test to see if debt is accretive to the deal", "replies": [{"id": "iwxp2fk", "text": "Show the math how that works please.", "replies": [], "depth": 4}, {"id": "ix0iy6p", "text": "So If I buy some piece of crap in Detroit at a 10% cap rate I will become the Mogul that you are?", "replies": [{"id": "ix0nm0u", "text": "That\u2019s not what I said. I said you compare your stabilized cap rate to interest rates to see if putting debt on the deal is accretive or not. Obviously we still run a full model but this is a smell test to see if we even want to bother entertaining a term sheet. You don\u2019t seem very institutional", "replies": [{"id": "ix0qt2w", "text": "Where are you getting your stabilized cap rates and how do you explain the market investors buying at these cap rate and you won't?", "replies": [{"id": "ix0rjxj", "text": "Stabilized NOI (eg FTM after a tenant starts paying rent) / (loan commitment / max LTV)). Usually financings have to go through an appraisal process which tends to back into the loan commitment as the max LTV so there is an implied valuation there", "replies": [{"id": "ix0w2oo", "text": "&gt; so there is an implied valuation there\n\nShow the math please.", "replies": [{"id": "ix0wgcz", "text": "Bro. Address my other point. The whole thing I said was about negative leverage but sure.\n\nThe appraisers use a bunch of methods to come to a conclusion like comps, direct cap, dcf. They will give you an \u201cas-stabilized\u201d value that\u2019s within the range of all these conclusions (usually closer to the direct cap based on the lease terms and market cap rate comps). This value will be used as a test to see if the loan commitment offered to you in the term sheet passes the LTV test", "replies": [{"id": "ix0xuh6", "text": "&gt;Bro. Address my other point. The whole thing I said was about negative leverage but sure.\n\nThis is the first I heard about your negative leverage.  Crap, now I have to ask what the calculation and definition is of, what did you call it, \"Minus levered\"?", "replies": [{"id": "ix0xzqz", "text": "I sent you an article. Read that, explains my original point of using the cap rate vs interest rate comparison as a smell test to see if placing debt on a deal is accretive", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}, {"id": "ix0w2xf", "text": "Also I never said I wouldn\u2019t. I would buy if my loans interest is lower than my stabilized cap rate", "replies": [{"id": "ix0xjsr", "text": "Nationwide mortgage rates 7%??\n\n&amp;#x200B;\n\nI can sell you properties all day long at 10-15% stabilized cap rates.  But do you have any money.  I need ability to close on these \"deals\"!!", "replies": [{"id": "ix0xtrz", "text": "Yeah that\u2019s why you\u2019re seeing a slow down in transactions. We\u2019re in a period of price discovery. Also why in hell would I buy a 10% cap, that just sounds like a red flag. Oh and we don\u2019t touch sub $100M deals so no thanks", "replies": [], "depth": 9}], "depth": 8}, {"id": "ix13apa", "text": "&gt;Also I never said I wouldn\u2019t. I would buy if my loans interest is lower than my stabilized cap rate\n\nI have offered this.  Put up or shut up!", "replies": [{"id": "ix13ftj", "text": "Bob. You\u2019re weird asf and managed to piss me off over cap rates. Fantastic troll. Either that or you have a room temperature IQ and can\u2019t understand nuance", "replies": [{"id": "ix14m38", "text": "I'm glad I pissed you off.  Means you are questioning your misinformation about them.  Eventually you will figure them out.", "replies": [{"id": "ix14rga", "text": "No, Im annoyed at you being obtuse. A cap rate is a tool among many to determine whether to invest or not", "replies": [{"id": "ix15a42", "text": "&gt;A cap rate is a tool among many to determine whether to invest or not\n\n100% incorrect!!!!\n\n&amp;#x200B;\n\nIt is a tool that shows you how much OTHER investors have paid for NOI.  Geez, V=i/r   Now show me HOW YOU use a cap rate to determine to invest or not!  Seriously!", "replies": [{"id": "ix15hhg", "text": "I show my investment committee my proposed cap rate. If I come to the table with a 3% when the comps are at 6% I\u2019ll be laughed out of the room. That\u2019s how. Just because you don\u2019t care about it doesn\u2019t mean it is useless. We look at it along with IRR/CoC/EM to determine risk profile, opportunists, and fund allocation", "replies": [{"id": "ix19qoa", "text": "Why are you proposing a 3 cap in a 6 cap market?", "replies": [{"id": "ix1bb0n", "text": "I\u2019m not", "replies": [], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "ix0rdb1", "text": "And again, PLEASE show me how you do that quick test.  I don't think you can!", "replies": [{"id": "ix0sfmn", "text": "This is a quote from an article. I suggest you read it, explains all this crap very simple. And try to not be too emotional about cap rates, they\u2019re just a metric among many that should be used when evaluating a deal.\n\nLink: https://www.globest.com/2022/06/14/welcome-to-negative-leverage-in-cre/?amp=1\n\n\u201cLet\u2019s say an apartment property is purchased for $50 million, with a net operating income of $2 million or a cap rate of 4.0%. If the property is financed with a permanent loan at 70% or $35 million, with an interest rate of 4.50% interest only, the annual mortgage payment would be $1.575 million. The annual debt constant is therefore 4.5% ($1.575M/$35M), the same as the interest rate since there is no loan amortization. Since the cap rate of 4.0% is less than the debt constant of 4.5%, the cash-on-cash return falls to only 2.8% (NOI of $2.0M less the debt payment of $1.575M, equals the cash flow to equity of $425K, divided by the equity of $15M, equals a return of only 2.8%) and this is negative leverage\u201d", "replies": [], "depth": 5}, {"id": "ix0yrz4", "text": "Come back bob. I showed you how", "replies": [{"id": "ix0zbq0", "text": "We all missed it!  Please copy and paste for us.  I know your time is valuable and I don't want to take you away from your dreams and schemes.", "replies": [{"id": "ix0zqn4", "text": "Here you go lazy bob:\n\nLink: https://www.globest.com/2022/06/14/welcome-to-negative-leverage-in-cre/?amp=1\n\nLet\u2019s say an apartment property is purchased for $50 million, with a net operating income of $2 million or a cap rate of 4.0%. If the property is financed with a permanent loan at 70% or $35 million, with an interest rate of 4.50% interest only, the annual mortgage payment would be $1.575 million. The annual debt constant is therefore 4.5% ($1.575M/$35M), the same as the interest rate since there is no loan amortization. Since the cap rate of 4.0% is less than the debt constant of 4.5%, the cash-on-cash return falls to only 2.8% (NOI of $2.0M less the debt payment of $1.575M, equals the cash flow to equity of $425K, divided by the equity of $15M, equals a return of only 2.8%) and this is negative leverage.", "replies": [{"id": "ix11wmn", "text": "**a return of only 2.8%) and this is negative leverage**\n\n&amp;#x200B;\n\n?? LOL", "replies": [{"id": "ix120tl", "text": "It means leverage is diluting the deal bc the CoC &lt; cap rate. Jesus Christ it\u2019s basic finance", "replies": [{"id": "ix13fb1", "text": "Can you show the math on that diluting thing?", "replies": [{"id": "ix13irn", "text": "I did. Read the article bro, your CoC % &lt; cap rate", "replies": [{"id": "ix14rx2", "text": "Still haven't seen the math or the definition of negative cash flow other than a 2.8% return somehow is negative cash flow.", "replies": [{"id": "ix14vvv", "text": "It says negative LEVERAGE. It means that the inclusion of debt is hurting your cash returns and you\u2019d be better off going all cash", "replies": [{"id": "ix15hbk", "text": "&gt;Harris\\_McLoving \u00b7 3 min. ago  \n&gt;  \n&gt;It says negative LEVERAGE. It means that the inclusion of debt is hurting your cash returns and you\u2019d be better off going all cash\n\nYa wanna show me how you know to go all cash?  LOL", "replies": [{"id": "ix15s1h", "text": "Yeah bc I get a better CoC by going all cash in the example above. My CoC would equal my cap rate (think it was 4%) while putting debt would make my CoC 2.8%. So I get a better return in both absolute and relative terms", "replies": [{"id": "ix19kfn", "text": "Got any math to back that absurd explanation?", "replies": [{"id": "ix1abcr", "text": "Yeah. Price is $100, NOI is $5, interest rate is 8%. My cap rate is 5/100= 5%. Assume that LTV is 50% ($50 loan) so if I go with this loan my cash on cash is = $5 - (50*8%) = $1. Now divide by the cash investment and you get 1/50= 2%. If I go all cash then my NOI is $5, there\u2019s no debt service so I divide by the entire purchase prince (again there\u2019s no debt) and I get 5/100 or 5%. See how the return is better in both a percentage and absolute basis? \n\nAlso, capex wouldn\u2019t make a difference bc we\u2019re talking about the same property and it would exist regardless of the financing structure.\n\nYou\u2019ve been arguing against cal rates for so long and this was my original point. They serve a purpose, especially when considering financing. Now tell me how do you go about deciding to put debt/ how much leverage to use?", "replies": [{"id": "ix1cwza", "text": "It's a sunny beach day in Honolulu so I'll look at your calculations later.\n\n&amp;#x200B;\n\nBut it is easy to determine leverage.  I'll take all you can give me.  Sell me a million dollar property in my markets with none of my cash in and I'm there.  Leverage is the risk to the lender.  THAT is why they charge more the less you have into the property.", "replies": [{"id": "ix1d5my", "text": "Lol alright. I see you have 0 financial acumen. But yeah, you\u2019re wrong and should reevaluate how you analyze your deals. Or hire someone to do it for you", "replies": [{"id": "ix1dut3", "text": "LOL!", "replies": [{"id": "ix1e3vf", "text": "LOL!", "replies": [{"id": "ix1fj9y", "text": "LOL X 2!", "replies": [{"id": "ix1glot", "text": "Don\u2019t forget to check the math bob. There\u2019s an optimal point for leverage, after that it hurts returns", "replies": [{"id": "ix1hqh0", "text": "OK, what is the math?", "replies": [{"id": "ix1hy40", "text": "Price is $100, NOI is $5, interest rate is 8%. My cap rate is 5/100= 5%. Assume that LTV is 50% ($50 loan) so if I go with this loan my cash on cash is = $5 - (50*8%) = $1. Now divide by the cash investment and you get 1/50= 2%. If I go all cash then my NOI is $5, there\u2019s no debt service so I divide by the entire purchase prince (again there\u2019s no debt) and I get 5/100 or 5%. See how the return is better in both a percentage and absolute basis? \n\nAlso, capex wouldn\u2019t make a difference bc we\u2019re talking about the same property and it would exist regardless of the financing structure.\n\nYou\u2019ve been arguing against cal rates for so long and this was my original point. They serve a purpose, especially when considering financing. Now tell me how do you go about deciding to put debt/ how much leverage to use?", "replies": [], "depth": 25}, {"id": "ix5tfje", "text": "Sup bob. Got any comments here or are you ready to admit cap rates serve a function beyond valuation", "replies": [{"id": "ix5vxx8", "text": "I would not lie to you.  Cap rates come from an income approach to value.  If you buy at a 10 cap you paid $10 if you bought at a 5 cap you paid $20.  Sorry, but that is all there is!  Cap rates are a valuation metric PERIOD!  \n\nI am open to you showing me what else you think they do!", "replies": [{"id": "ix5w44s", "text": "Test for financing. I showed you an example twice already", "replies": [{"id": "ix5ybsn", "text": "your figgering is faulty.  You are starting out thinking Cap rate is a return.  It isn't so your numbers are useless other than to value the property by cap rates and THEN making other calculations to determine cash flow based on your dynamics.  They mean nothing to another investor.", "replies": [{"id": "ix624vr", "text": "Lmao bro. I showed you the calculations bc you asked for an example. The principle stands, if all I know is my cap rate and the interest rate on the loan I can tell whether financing will be accretive or not to the deal without needing any calculations. \n\nI gave you those numbers as examples, you can replace them for whatever numbers you want and the principle will stand", "replies": [{"id": "ix6304m", "text": "&gt;if all I know is my cap rate \n\nALL THE CAP RATE IS TELLING YOU IS WHAT YOU PAID FOR NOI.  Every calculation after that is not a part of cap rate.  You are desperately trying to force a square peg in a round hole.  \n\n&amp;#x200B;\n\nShoots, if the property was valued NOT using cap rates where is your accretive calculations.", "replies": [{"id": "ix63dhy", "text": "Dude if a broker comes to me trying to sell me a building at a 4% and suggests I take financing for 6% I can tell him to pound sand without knowing anything else. Yeah the cap rate is a valuation metric but it can be used for other things and it\u2019s a good approximation of yield for stabilized properties", "replies": [{"id": "ix64msw", "text": "1.  Is it .2%  5% eleventy seven percent?  \n2. So you will jump on my 10% cap rate propertys if financing is 6%?  LOL  See how your cap rate correlation fails.\n3. And if the market is paying 4% then it is only YOUR problem that you are only a lookie loo in the market.  They figgered out the financing.  You sitting home in Mom's basement.", "replies": [{"id": "ix6ar6p", "text": "1.  No idea what you\u2019re trying to say\n2. No, that high a cap would signal a high risk profile. Or maybe you\u2019re an idiot so who knows but after DD\n3. Markets like that don\u2019t last. You can see it now when acquisitions have slowed down tremendously as a response to higher interest rates\n\nNumber 3 is the whole point", "replies": [{"id": "ix6bqqc", "text": "1.  You stated it was a good approximation for yield on a stabilized property.   What is the yield on a 5 cap, 10 cap, etc.\n2. So 10 cap flat out no good, 1 cap great????\n3. You are not in that market because you don't understand cap rates.  They could be wrong, they could be right but it is not the cap rate that was the problem.", "replies": [{"id": "ix6uzpb", "text": "5% and 10% if all cash. You can calculate CoC if you know the leverage, and depending on the type of lease you can estimate by just applying a growth factor. That answers 1 and 3. Number 2 is just dishonest I never said that", "replies": [{"id": "ix6vcix", "text": "&gt;5% and 10% if all cash\n\nHow are you accounting for capex?", "replies": [{"id": "ix6vh47", "text": "I\u2019m assuming it\u2019s a core property so minimal to none. Obviously this only works for these types of properties", "replies": [], "depth": 37}], "depth": 36}], "depth": 35}], "depth": 34}], "depth": 33}], "depth": 32}], "depth": 31}, {"id": "ix63h83", "text": "I can always derive the cap rate tho", "replies": [{"id": "ix64r5s", "text": "Why would you want to try?  Are things that slow at Mom's Basement Office?", "replies": [{"id": "ix64xy5", "text": "Bc I have a fiduciary responsibility to do DD for our investors. You\u2019re dumbing down an already easy field too much", "replies": [{"id": "ix66b0t", "text": "So how do YOU derive cap rates?  Do you have access to sales financials beyond published information?  Really, I am calling BS on you deriving market cap rates.", "replies": [{"id": "ix670lt", "text": "Yeah sellers would provide T12s and we get access to the properties financials. Lot of deals will be NNN with defined rent bumps so we know future NOI", "replies": [{"id": "ix67foy", "text": "So a \"listing\" and you think you can derive a cap rate.  PLEASE show me the process.  LOL", "replies": [{"id": "ix67pmq", "text": "No dude. We get access to the actual leases. You know what a NNN lease is right? You can easily derive NOI from there", "replies": [{"id": "ix690sq", "text": "Ding! Ding! Ding!  Great you agree that you are only calculating NOI.  GEEZ!  \n\nBut now back up your BS and derive some cap rates for me!!!!", "replies": [{"id": "ix6bea0", "text": "Lol I just divide that NOI by whatever prices we propose. Or do you also have an issue with that", "replies": [{"id": "ix6c8st", "text": "YES! YES! YES!  Where are you getting these \"proposed\" prices?  Sounds like you are running in circles.  I want a derived cap rate BY YOU and explain of what use it is.  Waitaminnute waitaminnute.  R=i/v   You are using made up V's   LOL  Derive my \\*ss.", "replies": [{"id": "ix6cl6n", "text": "Yeah they\u2019re hypothetical bc we\u2019re negotiating. We can use these hypothetical cap rates to evaluate financing options. We\u2019re going back yo my original point about comparing cap rates and interest rates", "replies": [{"id": "ix6cx6p", "text": "And that goes back to the OP. Increasing interest rates leading to cap rate expansion. Jesus Christ man, you\u2019re proof that anyone can make it in real estate", "replies": [{"id": "ix6fnjk", "text": "Jesus Christ man, go back!!!  I replied to a poster that thought a 4% cap rate was less profitable than a 4.5% treasury.  You are way off!", "replies": [], "depth": 43}], "depth": 42}, {"id": "ix6cxvw", "text": "&gt;We can use these hypothetical cap rates to evaluate financing options. \n\n[1.How](https://1.How) do you use cap rates to evaluate financing options?\n\n2.  Why are you usining hypothetical cap rates?  Seriously, your boss needs to know this.", "replies": [{"id": "ix6dg7y", "text": "1. You compare the cap rate to the interest rate to see if debt juices up your returns or dilutes them. I explained to you 5 times how those works\n\n2. She knows. Everyone does and it\u2019s the way the industry runs. Ppl at the IC will even ask this themselves, especially recently as there are concerns regarding the cost of debt", "replies": [{"id": "ix6euzg", "text": "Again all the cap rate is a valuation metric.  Sure, you need a value to them calculate and \"return\", cash flow, etc but it is the market value that you are using not the cap rate.  The cap rate is what gives you the value.  It's use ENDS there.  \n\n&amp;#x200B;\n\nSo now the industry is using hypothetical cap rates.  I have NEVER seen a CRE business reporting on hypothetical cap rates.  That is ridiculous. \n\nYou and your hypothetical cap rates.  Geez, get out of here.", "replies": [{"id": "ix6f3x2", "text": "Lol. It\u2019s use doesn\u2019t end there. I just told you another application. Just bc you don\u2019t know of other applications doesn\u2019t mean they don\u2019t exist. Also, this is finance your can use a tool for multiple purposes, not like we\u2019re breaking the laws of space and time here. You\u2019re ridiculous with this dogmatism", "replies": [{"id": "ix6fwuk", "text": "I'm not the one embarrassing myself saying \"Well what if we offered $10...or maybe $2.50...wheeeeee Imma gonna make you all rich!!!", "replies": [{"id": "ix6h950", "text": "So you don\u2019t negotiate? Lmao", "replies": [{"id": "ix6htks", "text": "Of course you negotiate but you have to be reality based on DERIVED CAP RATES FROM CLOSED SALES THAT ARE ANALYZED BY PROFESSIONAL THIRD PARTY COMPANIES and not some moroon that has a trailing twelve!", "replies": [{"id": "ix6jots", "text": "Lol you have it backwards. The appraisers will almost always back into the value at which sellers and buyers agreed to transact. And I\u2019m not a moron with a T 12 old man, I\u2019m an associate at one of the larger PE firms in the west coast", "replies": [{"id": "ix6podv", "text": "So your appraisers are there before your negotiation?  You are making no sense.  YOU need to be valuing the property for negotiation not waiting for your uninformed offer to be approved by the banks appraiser!!!   Please explain this imaginary process.", "replies": [{"id": "ix7djwr", "text": "Lol I\u2019m talking about a financing. Some lenders will require the proceeds they offer do not push past a certain LTV and need an appraiser to confirm. So yeah the appraisers come sometime between term sheet execution and execution of PSA\n\nOur offers will depend on what returns we target. Again, interest rates will impact how much you want to pay, and in turn the cap rate once we transact. This is because higher interest rates &gt; lower CF &gt; lower IRR all things being equal. So the acquisition price has to take a hit", "replies": [], "depth": 51}], "depth": 50}], "depth": 49}], "depth": 48}], "depth": 47}], "depth": 46}], "depth": 45}], "depth": 44}], "depth": 43}], "depth": 42}], "depth": 41}], "depth": 40}], "depth": 39}], "depth": 38}], "depth": 37}], "depth": 36}], "depth": 35}], "depth": 34}], "depth": 33}], "depth": 32}], "depth": 31}, {"id": "ix63p9h", "text": "Also, I\u2019m telling you how institutional investors think about it. And so has everyone else on the sub for years apparently. What makes you think the whole industry is wrong and you\u2019re right", "replies": [{"id": "ix65dd9", "text": "The fucking internet \"industry\"?  LOL  The only reason I'm here is because I'm rich and retired and it keeps me occupied on the beach.\n\nMy industry experience includes sitting down with ownership of Billion dollar properties helping them to realize their VALUE, not their \"RETURN\"!  \n\n[https://www.youtube.com/shorts/j-NZpDAag98](https://www.youtube.com/shorts/j-NZpDAag98)\n\n&amp;#x200B;\n\nPLUS my math shows anyone TO THE PENNY how much was paid for NOI.  Your numbers are BS.", "replies": [{"id": "ix67gpm", "text": "Now I\u2019m calling BS on your background. Either that or the industry was extremely unsophisticated back in the day", "replies": [{"id": "ix683s5", "text": "Because I can ask you basic questions that you can't answer?  Help me out here.  Do you not know that a 6.43% cap rate means the property exchanged at $15.55 per NOI dollar?  V=i/r  Geez,  anything else?", "replies": [{"id": "ix6b3iq", "text": "I gave you the answer and provided examples several times you donkey.\n\nIf interest rate &gt; cap rate then financing isn\u2019t very attractive. How do you have an issue with this idea? How do you approach financings? Do you just take wherever bc it is \u201cmarket\u201d in your view", "replies": [], "depth": 35}], "depth": 34}], "depth": 33}], "depth": 32}], "depth": 31}], "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}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "j1w94xr", "text": "I appreciate the explanations. Read the whole thread lol", "replies": [], "depth": 4}], "depth": 3}, {"id": "iwwehuc", "text": "I was going to send up the Cap Signal but you are already here.", "replies": [{"id": "iwxpbj6", "text": "Never hurts to send up the signal.  Let's the citizens know we're on the job.  \n\nGeez, look at all the novices that think buying at a 4 cap is equivalent to a treasuries return!!!", "replies": [], "depth": 4}], "depth": 3}, {"id": "iwzd9zg", "text": "Under normal circumstances, the cap rate is the yield adjusted for appreciation and changes in NOI.  But there is a lot of uncertainty regarding what those adjustments should be right now.  If we used the Band of Investment, we still have high interest rates, lower LTVs, and equity yield rates that have to be a lot higher than 4.5% for a treasury note.\n\nThe problem we have now is maybe a 30-year Freddie Mac deal makes sense, but even then near 7% rates are going to hit values.  A shopping center or industrial building? It's going to be a 5-year ARM.  What happens if interest rates are even higher in 5 years?  The uncertainty could be protracted making it worse.\n\nI'll be the first to say misconstruing cap rates for yield rates is a big problem, but no matter how you slice it - a 4.5% return tax free for 2 years is a better way to park your money until things shake out.", "replies": [{"id": "ix05iyl", "text": "[https://www.youtube.com/watch?v=vJXsW1ER5hw&amp;t=143s](https://www.youtube.com/watch?v=vJXsW1ER5hw&amp;t=143s)\n\n&amp;#x200B;\n\nLet's discuss.", "replies": [{"id": "ix0cf16", "text": "Downvote me and post an hour long youtube video.  There are multiple cap rates.  There is the overall rate, which the person in the video discusses, and the cap rate for the mortgage and the cap rate for the equity. \n\n[https://www.ccim.com/cire-magazine/articles/cap-rate-calculations/](https://www.ccim.com/cire-magazine/articles/cap-rate-calculations/)\n\nThis explains the relationship of the yield rate to the overall rate.  \n\nY = R + CR where CR is the constant rate of change.\n\nSo the yield rate is always higher than the cap rate. But to what degree? How do you forecast the rate of change in income or value?\n\nThere is a lot of uncertainty right now, so it is not easy.", "replies": [{"id": "ix0d7yo", "text": "Your link starts with this incorrect statement, \"A capitalization rate is the overall or non-financed return on a real estate investment\".  \n\n&amp;#x200B;\n\nAnswer this simple question.  What is a cap rate with 50% financing?  How about 100%?", "replies": [{"id": "ix0ecif", "text": "The Ellwood and Ackerson formulas are in the article.\n\nThis is the CCIM. Come on.", "replies": [{"id": "ix0eun9", "text": "u/Time_Yam301  You are off to a bad start when you can't answer my simple question.  Red pill blue pill, you are not the ONE!", "replies": [{"id": "ix1gwbx", "text": "I can't possibly answer your question without knowing the mortgage term, rate, amortization type, anticipated growth in income  and value over your anticipated holding period, or the equity yield rate that YOU as the investor desire or you believe is competitive for your market.\n\nYou have the 8th grade algebra in the article to solve this for yourself. It's not rocket science.\n\nHave you ever actually invested in real estate?  How can you not know that the cash on cash return is one component (the one you care about as it's your money!) while if you were a lender, there is an equity yield to the money you lend.  \n\nI'm willing to work with you, but come on. You're asking me questions about financing without giving me any financing terms.", "replies": [{"id": "ix5ehd7", "text": "&gt;I'm willing to work with you, but come on. You're asking me questions about financing without giving me any financing terms.\n\nNo I am not.  Geez, do the simple math and you will realize the cap rate is the same no matter the financing terms.  Was there a turnip truck in your recent history?  \n\n&amp;#x200B;\n\nBut yeah elaborate on why you think you need all that extra info.  LOL", "replies": [{"id": "ix5gquc", "text": "You have no idea how to calculate a mortgage constant or sinking fund factor. That would seem to be the problem here.", "replies": [{"id": "ix5pk83", "text": "NOPE!  That is not the problem.  The problem is that you cannot calculate a cap rate if it has financing or not!  Geez, that is basic CRE.", "replies": [{"id": "ix5rkxp", "text": "Are you really claiming the CCIM completely lacks credibility?\n\nRo = YE - M (YE + P1/Sn - RM) - DO1/Sn (1+ DIJ)\n\nHonestly, are you retarded?  Do you even know how to use Argus?", "replies": [], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "iwyqz7b", "text": "Income from treasuries are tax free too.", "replies": [{"id": "ix0m28k", "text": "They're exempt from state / local taxes, but if you live in a state without income tax - doesn't make a difference.", "replies": [{"id": "ix1gact", "text": "They are exempt from Federal income tax.", "replies": [{"id": "ix2aaju", "text": "Source?", "replies": [{"id": "ix3jvy4", "text": "I don't care. I could be wrong.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwvbffv", "text": "Values are certainly down but you won't see much trading until owners are forced to cut stuff loose for whatever reason.", "replies": [{"id": "iwwcd3k", "text": "Right, but I am having a hard time imagining what might force people to sell.", "replies": [{"id": "iwwe8tn", "text": "Especially with rents being sky high. However, if the high rate environmental persists, we could see some over -leveraged folks forced to liquidate some assets. Just depends on whether that will be enough to significantly shift the market.", "replies": [], "depth": 3}, {"id": "ix948f1", "text": "Interest rates.  Most commercial mortgages have a 5 year term at which point a bank can cancel or call the loan.  These 2-4% loans will turn into 8-12% loans.\n\nI am passing on a lot of commercial properties right now that have an 8-10% CAP rate and I won\u2019t look at anything under 8%.", "replies": [{"id": "ixejfnm", "text": "I could see this being more of an issue for office/retail properties with long leases that may or may not reflect maker conditions. For anything on the edge, I could see a rate increase causing problems. For multi family, I think this is less of an issue because the leases are shorter.", "replies": [{"id": "ixq3vdn", "text": "I am primarily in commercial, so that is where I am coming from.  Recently passed on 2 properties in an area that I really want but the leases have made them cash flow negative in the current market.  I could make about double the income now but they have 3+ years left on their leases", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "iwwf52k", "text": "And they probably won\u2019t be forced to. \u201cExtend and pretend\u201d will become the mantra of the banks. Since there wasn\u2019t a big washout after 2009, I don\u2019t see it happening now. Wouldn\u2019t mind being wrong though. All this \u201cfree\u201dmoney distorted and inflated all the asset markets.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwvbqws", "text": "MAIs, no matter their generation, should absolutely understand history, market concerns, and cap rate component influences.", "replies": [{"id": "iww25o1", "text": "MAIs are a joke", "replies": [{"id": "iwyt99m", "text": "Many are, but not all.  If they diversified into investment, brokerage and non-lender work, they are typically smart.  If they are cranking away at a national brokerage just throwing together Costar and numbers, they probably are. \n\nBut honestly, most everyone in commercial real estate is a joke today.  Everything has been about capitalizing on a 40-year massive decline in interest rates driven by government policy.  A policy that has come to an end.  I'd say 80% of the people in the industry at all levels have honestly no clue what to do.\n\nIf 30-year bonds go to 18%? The whole industry will be exposed as a joke.", "replies": [], "depth": 3}], "depth": 2}, {"id": "iww4th2", "text": "Appraisals are required to be empirically supported with qualitative support to smooth the edges. Appraisers can consider investor/developer/broker surveys and comments for extrapolation, e.g. to develop 10 year DCFs. ...... yet the problem remains that if you were a residential condo appraiser in FL in 2007-08 and you had six comps at $400,000, you'd be flayed alive if you wrote a $200,000 value, despite numerous people seeing the bubble popping.", "replies": [{"id": "iwwbrrk", "text": "Right, that is an interesting comparison. Appraisals seem to just follow the momentum of the market. When I was on the debt side, a lot of my time was spent finding the \"right\" comps to justify cap rate adjustments. So yeah... empirically supported.. but still leaves plenty of wiggle room to get the answer you want.", "replies": [], "depth": 3}], "depth": 2}, {"id": "iwysfmh", "text": "MAI here.  The problem is interest rates haven't increased since 1981. It's been a downward trajectory, which is part of the reason appraisals have gotten so bad and commodified.  Banks just ended up not caring by the 2000s and definitely after 2008-2010.   Bad appraisals didn't matter as interest rates would just keep going down and values would keep going up. \n\nVirtually no appraisers truly understand the band of investment method let alone how to perform a fundamental market analysis.  The latter is a USPAP requirement during periods of market instability (See Appraisal Institute Guide Notes 10 and 12).  \n\nI review bank appraisals all the time, and they are today nonsensical.  I regularly see reports with 3% or lower equity yield rates.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwvi5zh", "text": "Cap Rates will go up, values will go down to make that happen. There will be some lag in comps coming out to support this. I think right now a lot of would be sellers are choosing to hold on and get comfortable with their cash flows instead of accepting a price that's lower than what they could have gotten a year ago. \n\nAs loans roll and capital is needed for other opportunities we'll start to see sellers accept lower prices.", "replies": [{"id": "izcr37k", "text": "This is a sound assessment.  Agreed 100%", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwvjw5i", "text": "Curious if you went to AHF this past week given your focus? Either way, the chief economist of Freddie gave a market update one of the days and he seemed to think cap rates were up 100-150bp at this point. I think a lot of the info driving cap rates is backwards looking when trying to figure out recent sales to compare, so it will take some time for assets to sell at lower values and higher cap rates as the market adjusts and then those become the recent sale comps. It's particularly difficult with affordable assets given the interest rate environment given the restrictions on rents. Those assets are dscr constrained these days unless they have a PBRA contract and even then there's a likelihood it will be dscr constrained. \n\nYou are in the market more than I am (debt side), so I don't see it day to day like you do, so I might be off base here.", "replies": [{"id": "iwwcww9", "text": "I was not at AHF but I am glad this was discussed. What I find interesting about the 100-150bps increase in cap rates is that we've seen an increase of ~300ish bps on the debt side. I'd be very curious if there was an explanation for why the estimated increase in cap rates still results in a cap rates that are below current financing terms.", "replies": [{"id": "iwwk65m", "text": "150 bps increase in cap rates is huge. Historically cap rates did not move as much as expected with interest rate increases. A number of other factors influence cap rates. The business model of buying \u201cvalue add\u201d multifamily and refinancing in two years is likely not gonna happen for a bit. However, buyers capable of putting in more cash with less leverage, can make deals work with expectations of rents unlikely to come crashing down.", "replies": [], "depth": 3}, {"id": "iwwl5kk", "text": "PDF page 14 is the chart he had in the presentation: [https://mf.freddiemac.com/docs/2022-multifamily-midyear-outlook.pdf](https://mf.freddiemac.com/docs/2022-multifamily-midyear-outlook.pdf)\n\nHe gave additional context on cap rates (which I gave above) given this was written a couple of months ago.", "replies": [{"id": "iwwn5ec", "text": "fascinating. This is exactly the kind of thing I was looking for.", "replies": [{"id": "iwxrhjf", "text": "Glad I could help \ud83d\udc4d Feel free to PM if you ever want to talk shop outside of reddit. My focus is affordable housing on the debt side but my firm has debt, lihtc equity, affordable focused investment sales. Good luck out there!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwvktod", "text": "Most MAI are 50+, they've seen higher rates.  Real estate is just slow to move, but it's moving.", "replies": [{"id": "iwvmh25", "text": "No one wants to be the first.  Can you imagine the look on the client's face when the first MAI gives a market adjusted appraisal?  Once that first couple come in, it will all follow.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwvrsce", "text": "I\u2019m already seeing cap rate decompression. My typical thoughts regarding real estate markets is that because of close times your always seeing 2-3 months ago pricing on comps. I think that the market will have adjusted enough by Q2 of next year.", "replies": [], "depth": 1}, {"id": "iww9q7e", "text": "Lol, I see someone else already triggered the u/Honobob whirlwind.  Good luck OP!", "replies": [{"id": "iwweew6", "text": "What's the deal with this guy?", "replies": [{"id": "iwwek3i", "text": "I heard about some insane asylum escapees... (?)", "replies": [{"id": "iwxwy1e", "text": "Why are you harassing me?", "replies": [{"id": "iwyhj5s", "text": "Posting from your alt account hono?", "replies": [{"id": "iwyi9le", "text": "That answers my question, how?  Geez, if you can't participate in a discussion on commercial real estate shouldn't you maybe just not post?  So how does a 4 cap relate to a 4.5 treasury.  Post from any account.", "replies": [{"id": "iwzyreb", "text": "The problem, Bob, is that you don't engage in honest discussion about cap rates, you simply say the same thing over and over again and refuse to accept industry standards. You refute continuously, mathematics and don't seem to understand the simplest part that, in an algebraic formula if you know two of the variables, you can solve for the third.", "replies": [{"id": "ix02eyx", "text": "Then can we have an honest discussion about the subject instead of one liner quips and running for the hills when you cannot back up your argument?\n\nIndustry standards?  More like internet standards.  \n\nIrv.  Let's talk about that and come to an agreement what each component stands for!  \n\nAre you up for that?\n\n&amp;#x200B;\n\nLook at u/Harris_McLoving making a big statement but when questioned he cannot explain how he accomplishes what he says he does all the time.  That is the typical response.  My \"story\" never changes because it is factual and I can support it.", "replies": [{"id": "ix03ug6", "text": "Your story is not factual, you ignore the basic concept of algebra, as previously stated. If you know two of the inputs you can solve for the third. You reject the basis of this out of hand, continuously and over the course of years. \n\nI don't know what industry you are in but all my lenders, appraisers, and agents use cap rates the way generally described in this community, and not the way you do.", "replies": [{"id": "ix0jxrs", "text": "Show me what is not factual in my posts.  Please.", "replies": [{"id": "ix0qu35", "text": "Your overall rejection of algebra, how have I not made that perfectly clear? I'll keep it to one liners for you so that you can stay focused on the argument.", "replies": [{"id": "ix0tlqa", "text": "I understand Irv.  Your saying \"no\" adds nothing.  Elaborate what you think I don't understand.  I'll then show you how you are wrong.  Stay focused.", "replies": [{"id": "ix0xsjs", "text": "You don't understand algebra, brah.\n\ni=v/r is the same as r = i/v which is the same as v = i / r. You can't seem to grasp that simple concept. Without that basic understanding there's no use in having a discussion with you about cap rates.", "replies": [{"id": "ix165wh", "text": "Where/how are you getting the V in your equation?", "replies": [{"id": "ix1f478", "text": "It doesn't matter until you accept the fundamental math of it. You are deflecting, and not engaging in honest discourse.", "replies": [{"id": "ix4vzhp", "text": "I totally understand Irv.  Your saying I don't is ignorant.  YOUR problem is that you are willing to call any random number V and any made up calculation r.  Crap at this point I doubt you know what i is.  But I am willing to correct you or stand by your actual corrrections (you won't be able to but it could be informative to others).  \n\nCap rates come from an income approach to value called direct capitalization.   The formula is V=i/r   The V is what you are trying to solve for, the i is the possible NOI that the property can produce and the r is the amount that similar properties NOI have sold at.  \n\nWhere is the \"return\" ?", "replies": [{"id": "ix4y4hb", "text": "Bruh, we aren't talking about what the inputs are, we can't even get to that until you accept the basis of algebra.  (i=v/r is the same as r = i/v which is the same as v = i / r) you seem determined on defining the inputs.\n\nSo lets take it out, and start with the fact that (a = b/c) == (c = a/b) == (b = a/c) once you can accept that, then we can have a real conversation.  If you can't accept that we can't even argue because we don't have a basis of mutual understanding of what we are arguing.", "replies": [{"id": "ix5341a", "text": "I keep telling you I am educated on Irv.  Do you not know what Irv is and how it fits into the triangle?  ABC is for your high school algebra class.  If YOU don't understand Irv, well that would be the problem.  \n\n&amp;#x200B;\n\nGeez, I am up to speed.  I can wait on you but don't pretend like I don't know Irv.  (Psst...that is some algebra stuff)", "replies": [], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}, {"id": "ix1788n", "text": "This guy is like a flat earther. He\u2019s either very stupid or a troll", "replies": [{"id": "ix1f6j8", "text": "Oh I doubt he's stupid.", "replies": [], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}, {"id": "ix0temw", "text": "Posting this again, but to add more context. When T rates go up, lenders also tend to increase the all in rate. Negative leverage is when putting debt in a property makes the CoC &lt; cap rate. \n\nLet\u2019s say an apartment property is purchased for $50 million, with a net operating income of $2 million or a cap rate of 4.0%. If the property is financed with a permanent loan at 70% or $35 million, with an interest rate of 4.50% interest only, the annual mortgage payment would be $1.575 million. The annual debt constant is therefore 4.5% ($1.575M/$35M), the same as the interest rate since there is no loan amortization. Since the cap rate of 4.0% is less than the debt constant of 4.5%, the cash-on-cash return falls to only 2.8% (NOI of $2.0M less the debt payment of $1.575M, equals the cash flow to equity of $425K, divided by the equity of $15M, equals a return of only 2.8%) and this is negative leverage", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "iwxwv1q", "text": "I don't like people posting crazy misinformation in real estate forums.  A 4% cap means you paid $25 for each possible dollar of NOI.  Show me how that compares to a 4.5% treasury.  If you can.", "replies": [{"id": "iwyrlom", "text": "If we are talking about a cash transaction, buying your property for $100 would mean you get $4 per year into perpetuity. Your cap rate and sale price/value is suppose to reflect anticipated changes in income and value.\n\nIf you parked $100 in a 2-year treasury note, you'd get $4.5 pear year for those 2 years. That income is zero risk and is tax free.  \n\nSeems pretty simple to me.", "replies": [{"id": "iwzn3os", "text": "There is no $4 even with a cash purchase.  So you are comparing an imaginary number with a real one..  See, not so simple when you know what you are talking about.", "replies": [{"id": "ix0d1l4", "text": "Ok, so I buy a property for $100 with a 4% cap rate.  What is the income I can expect over a 5-year hold?", "replies": [{"id": "ix0kft2", "text": "??  How would you figger that with so little information?  The 4% cap rate is telling you and me that you paid $25 for each possible dollar of NOI.  Out of that NOI comes capex but you do not have that information.  \n\nThe real question is did you overpay at a 4 cap and if everyone else is buying at a 4 cap, WHY?  Use your brane!", "replies": [{"id": "ix0uw0w", "text": "You can for certain property types, like a NNN office lease with 3% annual bumps", "replies": [{"id": "ix0vctr", "text": "Oh, great!  I'd love to see the calculations on that to further my education.", "replies": [{"id": "ix0woe9", "text": "You take that year 1 NOI of $4 and grow by 3% thru year 5. NNN means the tenant pays for all property expenses", "replies": [{"id": "ix0z4ko", "text": "Still no calculations!  Why?  Do they not support your argument?  That is what we are all thinking.", "replies": [{"id": "ix0zct3", "text": "What do you mean? It\u2019s basically income * (1+ \n3%)^5-1. You know the NOI based on the purchase price and cap rate. You know it\u2019s a NNN lease so all expenses were reimbursed by the tenant so NOI = income. And you know the annual rent steps. What else do you need", "replies": [{"id": "ix0zmlu", "text": "&gt;What else do you need\n\nCapex.....", "replies": [{"id": "ix0zryb", "text": "Bro I said NOI learn to read", "replies": [{"id": "ix108w4", "text": "Do you REALLY not know what NOI is?  Geez, do you fart money to pay your capex?", "replies": [{"id": "ix10ruk", "text": "[ Removed by Reddit ]", "replies": [{"id": "ix11nyg", "text": "&gt; Capex is below the line and would run through your net income, not NOI.\n\nSo in your world net income is distinct from NOI Net Operating Income?  Explains alot.", "replies": [{"id": "ix11xgi", "text": "Yes? NOI refers to the operations of the property. Net income accounts for debt service, depreciation, etc", "replies": [], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}, {"id": "ix101do", "text": "&gt; What else do you need\n\nSee the real problem is that you don't understand cap rates.  What if you bought $4 of NOI at a 10% cap.?  How does your fake \"return\" look now?", "replies": [{"id": "ix10vjq", "text": "I would still back into the same income at a different cap you moron", "replies": [], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "ix1gj6f", "text": "So instead of getting $4 per year for my $100 investment, I'm getting less than $4 per year?  Why would I do that when I could get more than $4 per year from a 2-year treasury note that is not taxable at the federal, state or local level?", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "iwz6bol", "text": "He thinks a word has only one use/ definition and has a conniption whenever someone uses Cap Rate outside of valuation. Wait till he finds out what the British call cigarettes", "replies": [{"id": "ix035xa", "text": "I am happy to engage you in a discussion of cap rates.  Please list all your uses and definitions of cap rates and I can probably show you where you are going wrong and how they don't accomplish what you think they do.", "replies": [{"id": "ix084q1", "text": "I\u2019m sure you would be happy to you fucking weirdo. I\u2019m not going to be the 90th person to have the exact same conversation with you over the last 2 years.", "replies": [{"id": "ix0bn9v", "text": "&gt;Steamy\\_ron1988 \u00b7 24 min. ago  \n&gt;  \n&gt;I\u2019m sure you would be happy to you fucking weirdo. I\u2019m not going to be the 90th person to have the exact same conversation with you over the last 2 years.\n\nSee, u/Lord Ashton  Such professionalism in a commercial real estate forum.", "replies": [], "depth": 6}, {"id": "ix0dk5t", "text": "The 90 people left in a huff or when they realized their mistake they deleted all their posts.  YOU just need to be the ONE that proves me wrong.  I'd say you are not smart enough.", "replies": [], "depth": 6}, {"id": "ix0gza1", "text": "&gt;Steamy\\_ron1988 \u00b7 1 hr. ago  \n&gt;  \n&gt;I\u2019m sure you would be happy to you fucking weirdo. \n\nWould NOT!", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "ixg5x63", "text": "LOL!!!! Gotta love the Brits and their colorful way with language.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwwbmbj", "text": "MAI translated is \u201cMade As Instructed\u201d.", "replies": [], "depth": 1}, {"id": "iwwduok", "text": "Here in Toronto I can get a multi-family with a 3% cap rate, 3.5% if the seller is desperate, and finance it with a 7% corporate mortgage, or I can get a GIC at 5% for 5 years... Jeez, real tough choice. \n\nPrices will definitely come down, it's just that who wants to sell at (realistically) half of what a comp sold for 6 months ago?", "replies": [], "depth": 1}, {"id": "iwwja9z", "text": "&gt;My read is that this is because the industry has not yet adjusted to the reality of increased rates or accepted the impact that rates will have on purchase prices.\n\nThe affordable industry has not 'adjusted' because the subsidy programs (in their design and implementation) have not; (edit: competitive) LIHTC awards are static and while you can get supplemental allocations and/or layer on other public subsidies, this still may not be enough to close the gap and the additional subsidy in stack may trigger PITA subsidy review. There's not enough equity available for ground-up affordable deals to mitigate the impacts of higher cost debt. The deals that were underwritten in 2020 when money was cheap but didn't close before this past Spring have been stuck in purgatory. I say this to emphasize that there are parallel tracks/stories when it comes to affordable deals.\n\nAs for cap rates, yes, I agree that cap rates will go up in most markets and property prices will go down in all regardless of asset class. But I'm not confident enough to predict the delta.", "replies": [{"id": "iwwmcoi", "text": "4% LIHTC deals (larger market share than 9%) are not static. The \"award\" floats based on syndication rates and eligible basis. I hear you on the 2020 purgatory deals. Increased rates do result in higher gap financing needs; which will be an ongoing challenge. Maybe this gets offset when construction pipelines dry up and GCs/subcontractors stop bidding to lose? \n\nI don't really see how a static/floating LIHTC award should impact cap rates since cap rate valuation does not contemplate construction costs/development budgets.", "replies": [{"id": "iwwmm6v", "text": "I meant that once 9% deals are awarded on competitive basis, you're stuck with that award amount. My fault for conflating the two. Other than that, I agree with you.", "replies": [], "depth": 3}, {"id": "iwx7uma", "text": "Here\u2019s how I see it. LIHTC deals operate outside cap rate environments.  The pricing and competitive environment is in a bubble driven by investor demand for the tax credits. 85% of the market is CRA driven with the remainder insurance/corporate money seeking high yielding tax liability management tools. \n\nOK maybe the purchase price of properties intended to be syndicated as LIHTC transactions are affected by cap rates. But those will get acquisition credits in return.\n\nCap rates don\u2019t inform the LIHTC investment market- they might toggle the disposition calculation, but that\u2019ll only affect deals for which there\u2019s terminal value (a minority of projects).\n\nEdit: I agree with jonistaken in general. Adding addition context.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwwjeq1", "text": "It's clear that if interest rates go up, the charges on the owners increase and the net return rate on equity will go lower.\n\nTo have the same net return rate, the buying price must go down, so the cap rate goes up because the rents will represent a higher part of a smaller price.\n\nPlus, often the rents are indexed to some inflation indexes, so it's possible they can go slightly up.\n\nNow the problem will be the lag between the old and the new market, because owners who want to sell continue to ask high prices but less and less actors are willing to pay for that price.\n\nI presume that the number of transactions will decrease in the near future (I already noticed a slowdown from the beginning of this summer to be honest), until the new market doesn't become the new normal.", "replies": [], "depth": 1}, {"id": "iwwkg09", "text": "This change should put upward pressure on rental rates.  Owners wont want to face a value reduction of their properties due to higher cap rates.  Or may be squeezed on cashflow as mortgage payments increase at mortgage renewal.\nSo more reason for owners to ask for higher rents as much as local market will bear.\nEdit:\nThis may be a small offsetting factor to cap rate increases.", "replies": [{"id": "izcr7y5", "text": "LL rep here - can confirm this is happening in our portfolio.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwwl4o3", "text": "Simple cap rate valuation implies both growth rate and discount rate. In an inflationary environment with fewer supply additions and stable to increasing demand, cash flow growth rates could continue to outpace discount rate increases keeping cap rates low.", "replies": [{"id": "iwwmplk", "text": "Why would you assume inflation results in appreciating cashflow (NOI)? Wouldn't that depend on the I&amp;E expense ratio since the inflationary factors (all things being equal) would apply to both income and expense? Sure you can charge more rent, but you'll need to pay more for management, insurance, R&amp;M, appliances, unit turns, etc.", "replies": [{"id": "iwwypk5", "text": "Yes but ultimately if revenue and expenses go up by the same percentage, NOI will as well.", "replies": [{"id": "iwx4c7q", "text": "You\u2019re right. I was thinking about the generic exit test trends (income @2% and expenses @3%) instead of trending it all the same.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwwt3bq", "text": "The real estate market is  s l o w to react. Commercial transactions take between 60 to 90 days to close. Thus, contracts closing today were signed in Aug-Sept.", "replies": [], "depth": 1}, {"id": "iwx0p3s", "text": "People who have balloon payments will have to sell when they come due. Refinancing will not make sense for many. People always transact regardless of market cycle\u2026 \nCOPP is the rule of thumb - change, opportunity, price, problem\u2026", "replies": [{"id": "iwx78p4", "text": "If the property can\u2019t be refinanced, then it would be hard to finance on at acquisition cost that would satisfy current debt. I also think this is a case where inflation is helpful in proving up value and NOI, at least enough to clear a refi test with a lender that doesn\u2019t want to report a default.", "replies": [{"id": "iwz8h9d", "text": "I\u2019m confused what you\u2019re trying to say here. If my debt comes due and it doesn\u2019t make sense to refi, I will sell. I may have to sell at a loss to make new debt someone pencil for someone else, but sell nonetheless. Inflation doesn\u2019t necessarily affect value. If my rental increases are fixed, it doesn\u2019t matter what CPI says, now I\u2019m just losing on both sides of the coin. Cap rates are linear to debt and they are going up. Values will decrease due to cap rates and those values will ultimately be worth less due to inflation. Starting to shift to a buyers market where they can find sellers in situations like the above and get some good deals.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwx1w2u", "text": "there are no more 3.5% cap rates when you can buy a fuckin treasury and make more", "replies": [], "depth": 1}, {"id": "iwx1wmz", "text": "I don\u2019t think you need a whole paragraph for this. There usually is a 150-250 basis point spread between interest rates and cap rates. Some markets have shown to exhibit way more or less but it always follows the same pattern.", "replies": [{"id": "iwx4luq", "text": "I guess this is tracking UST as a proxy for rates, and maybe something happens when you use actual rates, but that is not my reading of the chart on pg. 14 https://mf.freddiemac.com/docs/2022-multifamily-midyear-outlook.pdf", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwx21mq", "text": "Personally I\u2019m waiting for those who fcked up and got a 5 year loan maybe 3-4 years ago and didn\u2019t refinance last year. Those people will have to sell and I\u2019m ready to scoop up some deals.", "replies": [{"id": "iwx4thc", "text": "Yeah, I could see this happening. Are there enough people in this bucket to move the market?", "replies": [{"id": "iwxbrsh", "text": "No there won\u2019t be but there will be some. You just gotta keep an eye out for them", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwxncxa", "text": "Two thoughts:\n\nConventional agency debt is around 5.60% - 5.80% rn, but a sub-four cap makes zero sense right now. \n\nMAI\u2019s tend to solve for the purchase price more-or-less on commercial properties because the contracted price is quite literally the value being determined by the market (using the buyer\u2019s own internal income approach). Assuming the sale is an arms-length transaction, who is the appraiser to say that the purchase price is &gt; the property\u2019s \u201ctrue value\u201d.", "replies": [], "depth": 1}, {"id": "iwyt9ov", "text": "OP - MAI here but will admit I stay away from multi family appraisals like they are the plague. I do a vast majority of my work in other property types, but I do handle large investment grade real estate in a secondary national market for one for the big CRE firms. Here is what I am seeing:\n\nTransaction volume is very slow. Up until September-October the sales we were seeing were really business as usual from a pricing standpoint\u2026 just less of them. In the last 60 days though, I am seeing the cracks. I\u2019m trying to proactively confirm \u201ccomps\u201d that have closed in this timeframe even if I don\u2019t immediately need them. Between those confirmations and the deals I\u2019ve just appraised, I\u2019m seeing retrades on price about 1/3 of the time. The number is probably higher but that is what I can confirm has retraded on price. For stabilized properties we are talking 1-5% retrades on price, so nothing too too crazy yet, but value add had higher percentage re-trade. \n\nSo from an appraisal perspective how do we handle this? You\u2019re probably seeing more discussion with \u201cmarket participants\u201d in the appraisals you see. We are going to try and get current conditions as best as we can and if historical sales don\u2019t paint that picture we will move to opinions from MPs. We try to be as reflective of the market as best we can.", "replies": [{"id": "ix86yf8", "text": "This is really interesting. Thanks for sharing!", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwyykfj", "text": "The other option that no one is acknowledging is that buyers will simply need to put up more equity and market wide prices won't actually tank that much.", "replies": [], "depth": 1}, {"id": "ixm3tl6", "text": "So you guys are saying I can get better returns rather than buying a chick fil a for a 3.5% cap?", "replies": [], "depth": 1}, {"id": "izmhv4p", "text": "Negative leverage is all the rage these days\u2026", "replies": [], "depth": 1}]