This weeks perspective is provided by Mike Sullivan:
I had an interesting conversation with my 13-year-old son recently. We were watching the Cincinnati Reds and he was hanging on nearly every pitch. He would make occasional unintelligible noises of frustration. Recognizing one of those teaching moments we as parents cherish, I asked him about his frustration to which he uttered that his team will never hit. I calmly reminded him that there are 162 games in a season and that watching baseball with the same passion and energy as a football game, as an example, will lead to even more frustration. I added that a baseball season is full of winning and losing streaks, batting slumps and hitting streaks. Oh, how that up and down nature holds true for our commercial real estate market.
Across the country, commercial real estate yields have been falling, especially in the top-tier markets. In particular, institutional investors are bidding up prices on quality properties which in turn are driving up values and compressing cap rates. We are seeing prices rise a bit even in the secondary and tertiary markets, although not to the same extent. Cap rates have steadily decreased over the past few years. However, according to the first quarter 2012 PwC Real Estate Investor Survey, while average cap rates decreased in 18 markets, they increased in seven and held steady in six. The pace of cap rate declines may be slowing. And I read recently that some institutional investors are assuming reversionary cap rates 100 to 150 bps higher than today’s cap rates. That’s not an insignificant increase.
What do you think? Will cap rates continue to compress as we appear to be on the brink of economic recovery. Or will they increase over the coming months or years? And will your favorite baseball team give you reason to cheer this season or cause you to look forward to football as early as July?