SAN FRANCISCO, CA -- “Cap rates will be higher in six months and a lot higher in 18 months,” David Shulman, a senior economist for the UCLA Ziman Center for Real Estate and UCLA Anderson Forecast, tells GlobeSt.com about what investors should expect next year. Shulman formed his forecast after the November election, which increased the probability the interest rates will rise next year.
“Our sense is that cap rates are going to go up because a 75 basis point move in the 10-year treasury will affect cap rates,” Shulman says. “We think the 10-year treasury could be 3% at the end of 2017, and that doesn’t look like a heroic prediction anymore. If that is the case, that means cap rates are going to go up by at least 100 basis points from where they are, and I think that is conservative. You have to remember that interest rates are going up 225 basis points form the election.” MORE
Comment: I failed to see Shulman's correlation between the "November election" and higher fed rates. For over a year, the Fed has telegraphed their intent to normalize interest rates from historic lows. Investors must adapt to the normalization. The "band-of-investment" factors both the capitalization of net income Plus the prevailing mortgage interest rate. The investor earns the income, the bank earns their interest -- both make up the property's investment financial profile. So, according to the theory, higher interest rates means lower perceived value of the asset.
But the band-of-investment has been questioned of late. See this discussion on its limits intended to promote a new software product.