Seventh Inning Market Cycle Stretches On, And On
When I meet clients, one of the first things they ask is if I have a sense of what direction the real estate cycle will take in coming months. An article in National Real Estate Investor offers a useful answer.
Since the dark days of 2009, we have enjoyed eight years of growth. Despite signs that growth is slowing or even flat in some cases, the common view is that this prolonged growth cycle will stay the course for at least another year, if not longer, reports NREI Writer Beth Mattson-Teig.
The question is whether this steady long-term growth will cause interest rates to jump too soon and reverse the current growth rate. Based on some market measures, investors now see the odds of a March rate hike at 75 percent, up from 22 percent last week, according to a recent MarketWatch article, which also states that the only factor blocking a rate hike is the Nonfarm Payrolls Report due March 10.
These statistics lead us to the question: How will higher interest rates affect pricing and cap rates as the Seventh Inning market cycle stretches on?
Given the rise in interest rates that has already occurred, cap rates have likely reached their low point. At best, cap rates will be flat or slightly higher in most markets this year due to higher capital costs, Mattson-Teig writes. As of January 2017, property prices were up 3.0 percent over the past year but flat in the past three months, according to the latest Green Street Commercial Property Price Index.
The keys to determining the future cap rates of the individual metro and property sectors are the depth of the bidder pool and the continuation of strong demand from foreign buyers, according to Mattson-Teig.
If property fundamentals remain solid, market cycles will continue to expand. For now, the amount of capital in terms of debt and equity is a factor in sustaining the market. Development, while slowing down in some sectors, continues to take place.
At the moment, the biggest obstacle to closing deals has nothing to do with a lack of capital or weak market fundamentals. On the contrary, there are plenty of buyers out there eager to put their hands on great real estate. But the biggest challenge is the ‘expectation gap’ that exists between buyers and sellers. As sellers adjust pricing to reflect our current real estate cycle and buyers react accordingly, the “seventh inning stretch” will be followed by a solid late-inning growth ahead.
Read NREI article here: ( to be hyperlinked http://nreionline.com/investment/seventh-inning-market-cycle-stretches-and )