Alternative investments and the rate pile
September 11, 2014 - Appraisal & Consulting
The commercial real estate capital stack is priced variously against alternative investments of similar risk, duration, liquidity and amount. The volatility in the public markets nevertheless has had a limited rippling impact on the pricing of the capital stack. Rates have increased gradually as 2015 approaches; however, tougher underwriting and terms have mitigated even rate increases. Good fundamentals, balance of supply and demand, and modest inflation have provided stability, attraction and appeal to the commercial real estate alternative. Differentiating characteristics of the alternative investment sectors will continue to impact rates and yields differently. Many maintain that capitalization rates (shortcut measure in real estate of current income and value or price like price earnings ratios is enterprises) move independently of rates in the capital markets. Accordingly, some expect the run-up to 2015 and after will not impact cap rates. Some disagree and upward pressure on cap rates and marginal increases.
The FED will release Economic Projections, revisited quarterly, with the minutes of the FOMC. The June Projections released June 18, 2014 were very similar to Projections released in March with the exception of GDP for 2014 which was reduced marginally because of the overall first half 2014. August jobs data were a disappointment; however, the stock market reacted well, and moved positive. The FED Forecast includes moderate growth and stability in economy and markets consistent with objectives and communicated strategy. However, the FED's next steps toward normalized market conditions are unprecedented just as the initial extraordinary steps to ease credit to stimulate the economy. The FED has repeatedly espoused gradual and transparent strategy to maintain growth and stability. So far, so good!
David Kirk, CRE, MAI, FRICS, is principal and founder of Kirk & Company, Real Estate Counselors, Boston.