Buy Commercial Property as US Bonds Reach Record Lows
Wednesday, September 01, 2010
Source: Bloomberg
Bloomberg reports: According to Real Capital, $20.7 billion of significant commercial, apartment, and hotel properties sold in the first half of 2010. This was up from just $11.1 billion over the same period in 2009. At the same time, cap rates have declined from their relative highs posted late last year, but remain elevated in comparison to their historical averages.
In a recent article on Bloomberg.com, author Hui-yong Yu indicated that the rise in sales might be a result of a shift in investors’ strategies. Based on data from the National Council of Real Estate Investment Fiduciaries (NCREIF), Yu illustrated that, with high-demand pushing US Treasury yields to near-record lows, investors may be reconsidering commercial real estate for its return potential. As US Treasury Bond yields hover near 2.7%, the relatively safe commercial and multifamily properties are still trading with cap rates (yields) well above 7.0% on average. According to the NCREIF, the gap between the two yields has been as wide as 475 basis points in the month of August, which can translate into millions of dollars to the large-scale investor.
With this sizable gap between yields, and no assurances bond demand will fall in the second half of the year, investors just may continue escaping to commercial property markets. Should they do so, yields on commercial properties may fall as a result. Already in 2010, Real Capital has reported cap rates below 6.0% on office buildings in prime markets. For lesser quality buildings in secondary or tertiary markets, cap rates go up from there, well into the 9.0%-range.
View the full article on Bloomberg: Buy Commercial Property as US Bonds Reach Record Lows
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Posted by: Nina Turner