Recently, I was lucky enough to hear Spencer Levy, Chair of Americas (for ) CBRE speak. I was both interested and pleased to see that we shared some similar points of view. Basically, I’m betting (along with Spencer) that we’re not going to enter a technical recession; of course, the technical definition of a recession being two consecutive quarters of negative GDP.
Unfortunately, as the world does continue to slow down (the U.S. included) we’ll see a period of low, sub – 2% or even sub – 1% growth. What this means is that interest rates and cap rates are going to continue to fall. For a good reference point; in Europe, where you have zero and negative interest rates, cap rates are 3.5% on top tier commercial real estate. Respectively here at home, the cap rates are 4.5%. Further, it’s easy to make the argument that the U.S. is in much better shape than Europe at the moment.) Cap rates on commercial real estate will go lower over the long term.
What’s the bottom line commercial real estate? Prices aren’t going down anytime soon, quality assets will still fetch higher prices, and the returns on those assets will remain 200 to 300 basis points above the ‘risk free rate’ or the 10-year treasury: currently 1.75%
BAM Strategy: Although we’re predicting interest rates and cap rates to go down, at BAM we still lock in long-term, low rates today. So, although we anticipate rates to drop and prices to continue to go up, BAM invests as if we expect rates and prices to go up tomorrow. We continue to lock in long-term maturity, fixed rate debt as a risk management tool.
The good news is, I don’t predict a recession for at least a couple more years, but the bad news is the slow/low growth. It will be increasingly important to acquire assets in sub-markets that will continue to see rent growth!
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