Increased search for yield
The increased value of commercial real estate assets combined with the risk aversion net lease provides, are drawing investors to seek yields more than ever before.
“In particular, demand remains strong for creditworthy net lease deals with rental increases in their initial lease term,” notes SimonCRE’s Director of Capital Markets and Dispositions Blake Curtis. “As such, we are seeing many tenants changing the structure of their leases to account for this demand. It is give-and-take. So, as an investor, which do you sacrifice? Lease term or yield/growth?”
Either way, as previously mentioned, investors are generally satisfied with their portfolios, which in turn is drawing more demand for potentially higher yields in the current cycle.
Steady Interest and Cap Rates
While the Federal Reserve raised interest rates three times since last December, it still remains considerably low – hovering around 1.25%. And whether or not interest rates hikes are set for the coming months, they will still likely remain at historic lows. Prior to the Great Recession, the rate was above 5% and in 2000, with a strong economy in hand, the rate held above 6%.
So, where do cap rates go from here? Despite some concern that they’ll move in lockstep with interest or 10 year treasury rates, it seems unlikely that cap rates will rise as quickly. In fact, the last time our economy saw periods of increased interest rates, cap rates actually decreased while pricing within that period jumped. Further; the 10-year treasury remains low as well – 2.13% – which should help keep bank lending rates, and all other interest rates, down.
Currently, cap rates remain near historic lows at an average of 4.47% due in large part to strong demand for institutional-quality assets.
Abundance of capital
The landscape for lenders has become far more competitive.
According to CBRE’s Lending Momentum Index, loan closing increased between March and June, and are up 27% from last year.
Additionally, borrower interest for CMBS loans and the availability of capital is continuing to increase, reaching $38.8 billion at the end of the second quarter, further signifying a strengthening CMBS market for the second half of the year.
And as of June, private debt managers held $205 billion in readily deployable capital, up $8.9 billion from December 2016.