Commercial Real Estate Cycle
Where do you think we are in the real estate cycle? How fast do you think that change will come? What changes can we prognosticate for the short term future? These predictions matter because they affect our current financial decisions.
Here are my thoughts:
Current capitalization rates tend to be below the historical average. This I believe to be in large part because interest rates are low. If the positive correlation between interest rates and capitalization rates is not immediately evident, please see the following article that shows the positive correlation between the 10 year treasury and capitalization rates:
http://blog.stewart.com/stewart/2016/12/01/commerc....
The lack of any inflation has allowed the Fed to keep these interest rates low for an extended period of time. Indeed, fears of deflation and recession have demanded that the Fed keep the interest rates lower than some bankers desired. However, we are now finally seeing signs of inflation. Wages are rising and inflation is coming back. These inflationary pressures will increase due to the tax cut. As a response, the Fed has already announced that they will be raising interest rates this year.
With the increase in interest rates, it seems to me that there will be a force driving capitalization rates upward. Since the cap rate is a mathematical derivation of commercial values and net operating income, it seems tautological to claim that rising capitalization rates will either drive down commercial values and/or increase net operating income (by driving up rents).
Am I the only one convinced of this upcoming event or do others see this change coming? Does this make you want to sit out of the market for a time and wait for the rising capitalization rates to materialize?