Cap Rate Limbo: How Low Can They Go?
[{"id": "cp97zc5", "text": "Not many things I agree with Keynes on but this is one of them, \"the market can stay irrational longer than you can remain solvent\"", "replies": [{"id": "cp9ghx6", "text": "So very true!  I bought a small (30-50 unit) B class property about 7 or 8 years ago around a 10 cap.  Today I cant find a C class for even an 8 cap.  The market is nuts right now.  ", "replies": [{"id": "cp9hqu7", "text": "&gt;The market is nuts right now.\n\n\nHow do you feel about this?\n\nWould you please elaborate as to what signals you see that suggest the market is nuts?\n\nP.S. I am an outsider, a young investor, a know-nothing.", "replies": [{"id": "cp9ig2a", "text": "I also know nothing and have been in multi unit apartment complexes for almost 20 years now.  Dont worry about being a know-nothing.  The day I start thinking I know something is usually the day I start making mistakes and losingsome money.  The only thing I do know is things always change.  As far as signals are concerned im not an expert or analyst.  Heres all I got for you.  If I buy something for a dollar and I have to take a loan for 75 cents at 5 percent interest I would like to be able to pay that off within 15 years.  In todays market it might take me 25 plus years to pay off that 75 cents based on what shit is selling for.  25 years is longer than 15 years...  I dont like that.", "replies": [{"id": "cp9ivpr", "text": "Thank you NoIdea, that's helpful.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cp9h4z8", "text": "multiple offers for great properties, many of which going above asking. How is this not a bubble?", "replies": [], "depth": 1}, {"id": "cp9k6gq", "text": "As a commercial agent from Australia, this reads like it could have been written about the market here. 3 years ago, I thought cap rates couldn't go much below 4% and now they are pushing below 3% in some areas. ", "replies": [{"id": "cpae22s", "text": "WTF? 10 year Australian bonds are at 2.86% today and they still have a Aaa Moody's rating. That doesn't makes sense. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "cpa11ej", "text": "CAP rates are influenced in part by interest rates. As lending rates increase so will CAP rates. ", "replies": [{"id": "cpadx15", "text": "Leveraged returns have a huge impact on cap rates. I would say loosening UW standards are also contributing to the compression. It stinks of 2007-2008...", "replies": [], "depth": 2}, {"id": "cpkagn3", "text": "The spread between interest rates and cap rates is actually relatively normal at the moment, believe it or not. Int rates have not been this low since cap rates were even widely considered, but the spread between them is not tighter than historical average. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "cpa28mf", "text": "I work primarily in retail development in the southeast but over the last couple of years we have done some mixed use product which has opened up some contacts with multifamily investors. \nI have two different parties, both west cost groups looking to purchase large B and C class multifamily products in the Carolinas and parts of Tennessee. \nWe have made two solid offers on different products 7.6 and 7.8 on value add 100+ and 200+ B grade products and been snubbed. Granted these products were listed as almost a blind auction but on both properties we were apparently way off the mark.  \nEverything in the major markets in these areas that fits that criteria has either gone under contract or sold in the last the three months. \n\nIts actually impossible to know what the real cap rate is just now as its moving so fast. In the major metro markets of Tenn, SC, NC and Georgia I would say somewhere between a 6.8 to 7.8 but these same properties would have been lucky to see a 8.5 cap six months ago. ", "replies": [], "depth": 1}, {"id": "cpaa30k", "text": "I think a correction is coming.  Particularly in the &lt;200 unit space and NNN space.  \n\nIt seems like the guys that are doing 1031's and have capital they have to bury in RE somewhere are driving the market into the ground.  \n\nI have a lot of clients who are sitting out waiting for a correction because spreads aren't high enough to do any lending on a lot of these assets and get some leverage plus they can get higher returns in equities or other investments.  \n\nThen if they are financing somewhat you have this huge 'holy shit shit when this balloons I am going to have to bring cash up to refi' worry.\n\nI'm in a smaller market and we lag the big ones, but we are just starting to get killed here because all the coast cash is coming in and dropping our caps into the ground.  The locals are all sitting out somewhat and letting them fight over it.  I have a feeling it is all going to stabilize then slowly rise up.  If rates shoot up that will certainly help this happen.  \n\nI think the most frustrating thing is caps are so low because of a somewhat lack of supply.  When we fix in all these transfers now at caps this low, which may be very temporary, we might lock these properties up for a while as the owners avoid realizing a loss on a sale, creating more restrained supply in the future.\n\n--edit-- Personally I think higher rates that drive inflation a bit will loosen up more supply too.  I'd like to see rates go up a bit and caps to follow then I think after a small period of time we can see appreciation solve some problems for people and a lot more properties hit the market.", "replies": [{"id": "cpkaegg", "text": "doesn't the fact that you have clients sitting on the sidelines suggest that a correction (if and when it happens) will be short lived? If there is a lot of money waiting for a price dip, that means the dip will be brief and volatile as the side liners jump in to try and catch all the falling knives. ", "replies": [{"id": "cpkb0r9", "text": "It might.  I've actually thought a lot about this.  I don't think it does though.  \n\nI follow your logic, but I think the mistake is assuming money will always wait and liquidity is always high.  Just as one example I have a client that told me the other day he is now looking at purchasing franchises and businesses because of the complete lack of returns in re right now.  If he dumps a few mil into that, he ties that money up.  Its gone from the re market for a while.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]