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Cap Rates…Rise or Fall? June 14, 2011

Posted by Erik Swanson in Articles, Blogs, Research/Data, Retail News, Sale, Uncategorized.

Today, I was speaking with a developer who’s contemplating putting a retail center on the market. This particular asset is stabilized and he’s enjoying increased cash flow after his interest rate has adjusted downward on a variable rate loan.  He believes his tenants will accept their scheduled annual rent increases and expects the operating income will rise accordingly. Life is good, why sell? 

Investors seeking stabilized assets with has contributed to several quarters of cap rate decline. Couple that with a looming inflationary period and the likelihood of rising interest rate environment seem to beg the question, “is it time to sell?”  There are a few dynamics to consider here; the increasing availability of inexpensive debt, the lack of suitable alternative investments, and the sentiment that retailers are healthier. Investors have seen that vacancy rates have leveled off and rent growth, albeit modest, may soon begin. This is putting downward pressure on cap rates as buyers price in these future NOI gains.

Every deal is unique unto itself and obviously needs to be analyzed beyond how the value is affected by today’s cap rates. It seems clear however, that we’ll see rising cap rates in the not too distant future. Click the link to check out an interesting article in National Real Estate Investor  .



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