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  • Writer's pictureKyle Nagy

Cap Rates Under Pressure

We know this already, what makes this story interesting? If you do not have time to read the article, allow me to extract and apply the relevant.

"The 10-year US Treasury is currently at a level not seen since June 2007."

I know it hurts. Especially, since investors and the markets have been drunk on nearly free debt for years.

“Borrowers with maturing debt are most likely looking at cash neutral or cash infusion refinances in order to shoulder the higher rates.”

Meaning a refinance is only possible at the existing loan amount or by injecting new money into the loan, but for how long?

“The forward 10-year treasury curve suggests capital costs will increase during planned hold periods of three to five years."

Yes, they are suggesting rates will be higher for 3-5 years. Prior comments suggested 12-24 months.

"There appears to be no denying that we are returning to the historical average for commercial and multifamily mortgage rates."

Which is not terrible, unless prices do not adjust and potential CRE investors look elsewhere.

"In this instance, why buy real estate when you can put money in a 10-year note and get more money than you would by investing in real estate?"

CRE is not just another stock, bond, or commodity. Successful CRE investing requires years of experience, underwriting expertise, and a foundation in real estate fundamentals. Why even compare to Bonds?

“For several years, I’ve been concerned that many real estate investors have been treating real estate as if it were day trading."

Best line of the article and I mostly agree. Cheap debt, decreasing cap rates, and rising rents can overcome inexperience and unmitigated risk. Those days appear to be over.

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