One who gains strength by overcoming obstacles possesses
the only strength which can overcome adversity. Albert Schweitzer
Oct 21, 2015 Beth Mattson-Teig
Investors are reading the “tea leaves” in the bond market to help determine what might lie ahead for corporate real estate cap rates and property prices.
There is a correlation between the bond market and commercial real estate, and that could mean that there are some definite changes ahead. The changes in BBB and BB rated bonds are most relevant to the real estate market. To that point, the low investment grade BBB and high non-investment grade BB bonds have seen yields rise over the past several months.
BB bonds in particular have seen yields increase by more than 120 basis points, climbing from 4.52 percent in early March to a range between 5.71 and 6.22 percent during the first two weeks of October. BBB bonds also have seen a modest uptick of about 50 basis points, rising from 3.55 percent in early February to a current rate of between 3.98 and 4.12 percent.
One argument in favor of increased capital flowing to commercial real estate in recent years has been that the yields investors can get in the sector are attractive relative to alternatives such as bonds. In theory, higher yields in BBB and BB bonds might pull some capital away from real estate. The idea of comparing real estate prices with bond yields is a way of saying there are investment alternatives, and bond yields look much more attractive today than they did a year or two ago, says Cedrik Lachance, managing director at research firm Green Street Advisors.
The reality is that bonds and real estate are two very different investment vehicles. Bonds are liquid and stable investments, but there is no upside other than the stated rate. Real estate is highly illiquid, but there also are some added benefits in being able to take advantage of property appreciation and net operating income (NOI) growth.
“So there is not a direct substitution, per se,” says Ronald F. Greenspan, senior managing director and co-leader of the real estate solutions practice at FTI Consulting in Los Angeles.
The bigger impact is that the available yield in the bond market influences what investors demand and expect in their real estate investments.
“Your expectation for your real estate investment, again because it is less liquid and because it is more risky, will be for a higher yield than on your bond portfolio,” says Greenspan. What that means is that as yields go up on bonds, it doesn’t necessarily shift dollars between the two buckets, but clearly changes investor expectations related to returns.
Outside of the real estate market, spreads have widened. For companies trying to borrow money in the unsecured debt market, it has become more costly in terms of a premium or spread to treasuries. CBL & Associates Properties (BBB rated), a regional mall REIT, recently pulled its unsecured debt raising deal. “That is partially a CBL issue, because of the low quality of their assets,” says Lachance. “But, to me, it also is reflective of a market and what it will finance.”
CBL’s inability to go through with an unsecured offering would suggest that the market is becoming a lot more selective in what it will finance, notes Lachance. The pace at which new CMBS issuance is coming to the market would suggest the same thing.
“When you look at the bond market tea leaves and the public market tea leaves, it suggests that private market real estate prices could decline in the near future,” he says. The caveat to that is that there is still a powerful wave of capital and competitive pressure, both from domestic and international sources that are looking to invest in U.S. real estate, he adds.
Although real estate cap rates have yet to follow bond rates higher, many believe this is what’s in store for the market. Rising interest rates will likely trigger higher cap rates. However, it remains to be seen whether a rise in cap rates will signal a subsequent drop in real estate prices, or whether fundamentals will remain strong enough amid an improving economy that properties could maintain current pricing levels, or even see a further rise in prices.
“I think the general consensus is that we’re going to have an improving economy, therefore you would expect to have improving prices on real estate,” says Greenspan. Yet rising cap rates as interest rates go up will have a contrary effect. “The question is which effect is more powerful, and a lot of that will deal with the rate at which interest rates go up,” he says.
Ultimately, there are definitely some signs to watch in the bond market, but it may be a bit too early to draw any definitive conclusions on future cap rates or real estate prices.
“I think there is definitely a correlation between cap rates and the bond market,” says Greenspan. “But I would be hesitant to call a six-month change in bond yields a trend.”
I am actively looking to build relationships with Real Estate Investors and Owner / Users for Phoenix – Scottsdale – Tucson – Maricopa County – Pima County – Pinal County – Cochise County – Santa Cruz County –Yavapai County – Gila County – Arizona , USA
WHY PHOENIX ARIZONA : ???
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix.
Investors and owner/users need to really know the market before making a move in commercial investment properties as the market has a lot of moving parts today. What’s going on socio-economically, what’s going on demographically, what’s going on with location, with competing businesses, with public policy in general — all of these things affect the quality of your commercial properties/investment properties. Therefore, you need a broker who understands commercial properties. Please go to my web-site and get all the newsflashes and updates in Commercial Real Estate.
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. I am also a commercial land specialist in Phoenix and a Landspecialist in Arizona. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail email@example.com or call me on my cell 520-975-5207 or Office:480-948-5554
Walter Unger CCIM
Associate Broker, Kasten Long Commercial Group
2821 E. Camelback Rd.
Phoenix, AZ 85016
View my listings and my profile at:
a little about me and my expertise – video
Delivering the New Standard of Excellence in Commercial Real Estate
- Commercial Real Estate Scottsdale
- Commercial Real Estate Phoenix
- Commercial Real Estate Arizona
- Commercial Investment Properties Phoenix
- Commercial Investment Properties Scottsdale
- Commercial Investment Properties Arizona
- Land Specialist Arizona
- Arizona Land Specialist
- Land Specialist Phoenix
- Phoenix Land Specialist
- Land For Sale Phoenix
- Land for sale Arizona
- Commercial Properties For Sale Phoenix
- Commercial Real Estate Sales Phoenix
- Commercial Properties Phoenix
- Commercial Properties Arizona
- Commercial Land Specialist Phoenix
- Commercial Land Phoenix
- Multifamily land Phoenix
- Retail Land Phoenix
- Industrial Land Phoenix
- Land Commercial Phoenix
- Land Retail Phoenix
- Land Industrial Phoenix
- Land Multifamily Phoenix
- Industrial Land for sale Phoenix
- Land Industrial
- Investment Real Estate
Disclaimer of Liability
The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.