Nareit’s Post

Good way to see the relationship between fed funds rate and commercial property

Commercial real estate has been rocked by a rapid rise in interest rates that has stymied deal activity and depressed asset values. Investors hoping that rate reductions from the Federal Reserve will help ease the pressure have been disappointed as markets have dialed back expectations for cuts. This disappointment has, in turn, weighed on investor expectations for #commercialproperty. The forward view provided by the Pension Real Estate Association’s quarterly survey has deteriorated as expectations for rate cuts move further into the future. Investors were forecasting a total return of 7.9% for the 2024 calendar year back in early 2022, but this outlook has progressively declined. In Q2 2023 it was down to 3.3%, and in the most recent Q2 2024 #PREA survey, the forecast is for a negative total return. Read more #MSCIResearch on real estate: http://ms.spr.ly/6042YAE6j

All eyes have been on the Fed with sentiment in the #CRE asset class moving in the opposite direction to interest rate expectations. Recent cuts by central banks in Canada and Europe have spurred hope that a monetary policy turning point is approaching. But rate cuts alone will not solve all of the challenges investors face.

Cap rate, a key indicator for property valuation, shows pre-debt service return on investment. Calculated by dividing net operating income by purchase price, it's influenced by various factors. Understanding these factors aids in evaluating investment properties. Wanna beat the recession? Now is the time to invest, take our five-question survey to see if you're a good fit: lvpefund.com/questionnaire https://lnkd.in/dejDWUTb Read more here 👆 #RealestateMarket #RealestateInvestment #CommercialRealestate #MultiFamilyRealEstate #AccredictedInvestors

In REITs We Trust! But where are the returns? The recent performance of the Real Estate Investment Trusts (REITs) in Canada and elsewhere is concerning. According to data compiled by Macrobond, Canadian REIT returns are down by 8.5%. In contrast, at -1.9%, U.S. REIT performance suggests that Canadian REITs are trailing far behind their American counterparts. When we look at a global comparison of REITs, the trend is not encouraging. Only Australia seems to be bucking the trend with a positive return of 1.6%. The rest of the countries, including the U.S., France, Spain, the UK, Japan, Germany, Canada, China, and Italy, are all experiencing negative returns. Unlike the red-ink-splattered balance sheets this year, the performance of REITs in several countries, including Canada, was better last year. In 2023, Germany topped with a 36.6% return, and Canada, at 7.4%, trailed the United States, which had a 13.3% return. Canadian REITs, according to data from Macrobond, have been on a rollercoaster ride since 2017, with returns swinging from positive to negative. This raises a crucial question: can such volatility in REIT returns be considered a sign of a dependable and steady investment? As I am not a REIT expert, I would greatly appreciate your informed insights on this matter. Comment away! https://lnkd.in/g8sSxxkZ

Cap rate, a key indicator for property valuation, shows pre-debt service return on investment. Calculated by dividing net operating income by purchase price, it's influenced by various factors. Understanding these factors aids in evaluating investment properties. Wanna beat the recession? Now is the time to invest, take our five-question survey to see if you're a good fit: lvpefund.com/questionnaire https://lnkd.in/eTXCg2kc Read more here 👆 #RealestateMarket #RealestateInvestment #CommercialRealestate #MultiFamilyRealEstate #AccredictedInvestors

Cap rate, a key indicator for property valuation, shows pre-debt service return on investment. Calculated by dividing net operating income by purchase price, it's influenced by various factors. Understanding these factors aids in evaluating investment properties. Wanna beat the recession? Now is the time to invest, take our five-question survey to see if you're a good fit: lvpefund.com/questionnaire https://lnkd.in/e2VnDMFe Read more here 👆 #RealestateMarket #RealestateInvestment #CommercialRealestate #MultiFamilyRealEstate #AccredictedInvestors

What's a Good Cap Rate? Cap rates play a crucial role in determining the potential returns on a property. But why is it often recommended that cap rates should be 2-3% above the interest rate? Let's delve into this important concept. Why Cap Rates Need to Be Higher than Interest Rates: Risk Premium: The difference between the cap rate and the interest rate serves as a risk premium. Real estate investments carry inherent risks such as market fluctuations, tenant turnover, and property maintenance. A higher cap rate compensates investors for these uncertainties, ensuring that the returns justify the risks involved. Positive Cash Flow: When the cap rate is significantly higher than the interest rate, it ensures that the property generates a positive cash flow. This means that after covering the debt service, the investor still has a surplus, enhancing the property's financial viability and attractiveness. Inflation Hedge: Higher cap rates provide a buffer against inflation. As the cost of borrowing increases, having a cap rate that surpasses the interest rate helps maintain the investment's profitability over time. Why Cap Rate Doesn't Matter in a Value-Add Deal: In value-add deals, the primary focus is on the property's potential for improvement and subsequent value appreciation, rather than its current income. Here's why cap rates are less relevant in such scenarios: Future Potential: Value-add investors look beyond the current income metrics. They target properties with untapped potential, planning to increase the NOI (Net Operating Income) through renovations, better management, and strategic repositioning. Equity Growth: The real goal in value-add deals is to significantly enhance the property's value. By improving the property, investors aim to achieve substantial equity growth, which can far exceed the returns implied by the initial cap rate. Short-Term Horizon: Value-add deals often have a shorter investment horizon compared to core or stabilized assets. Investors are more concerned with the exit strategy and the anticipated value after improvements, making the initial cap rate a less critical factor. In summary, while cap rates should ideally be 2-3% above the interest rate to ensure a healthy risk premium and positive cash flow, their significance diminishes in value-add deals. In these cases, the focus shifts to the property's potential for improvement and the substantial equity gains that can be realized. #kansascityrealestate #kansascitycre #commercialrealestate #CapRates #ValueAdd #InvestmentStrategy

The CRE Investment Climate Just Changed… Capital targeting commercial real estate (CRE) investment is on the rise, driven by the deployment of pent-up dry powder into CRE assets. Despite some challenges in specific office segments, overall asset performance remains robust, reflecting investor confidence and a positive market outlook. The yield spread across CRE sectors has been widening, with the average overall CRE cap rate increasing by 90 basis points since 2022, reaching 6.7%. Additionally, the gap between the 10-year Treasury yield and CRE cap rates has expanded to its widest level since 2022, indicating growing investor demand for CRE assets relative to safer Treasury securities. The cost of debt capital is decreasing, as Wall Street sees a high probability of a Federal Reserve rate cut in September. Lenders are responding by reducing their spreads over the basis, reflecting diminished concerns about future rate increases. Furthermore, the share of lenders tightening their lending standards has dropped to its lowest level since the second quarter of 2022, suggesting a more favorable borrowing environment. #NNN #retail #realestate #investment #investing #commercialrealestate #property #passiveincome #cre #investor #realestateinvesting #commercialproperty #netlease #retailrealestate #fed