Landmark Links March 6th – Capped


Lead Story….. Conventional wisdom and basic financial math both dictate that commercial real estate cap rates should rise when interest rates do.  However, we’ve been in a rising interest rate environment for well over a year now yet cap rates are basically flat during that time – with the exception of certain segments of the retail market, which has little to do with interest rates.  Over the past few quarters, we have heard a lot of concern from capital partners about cap rate expansion, yet cap rates themselves have remained quite sticky to the downside.  So, why has the relationship between interest rates and cap rates broken down of late? Spencer Levy, CBRE’s Senior Economic Advisor and Head of Research, the Americas had made a good point last week that was picked up in World Property Journal (emphasis mine):

“Secular factors, particularly the strength of equity capital flows, have upended the historic relationship between interest rates and cap rates. For foreign capital flows, the fall in the dollar is a big offset to rising interest rates.”

At a time when the vast majority of large real estate owners where domestic, it made more sense for cap rates to closely track interest rates.  However, once the market is increasingly exposes to large buyers with foreign currency, it makes sense that the correlation would become weaker.  When the dollar falls (as it has been doing for a year now), dollar denominated assets become relatively more attractive to holders of foreign currency who make up an ever-growing share of commercial real estate investment in the US.  The irony here is that conventional wisdom also dictates that the dollar should increase in value as interest rates rise, reflecting a strengthening underlying economy.  However in our current case, deficit concerns coupled with rising inflation expectations have caused the opposite to happen, attracting even more foreign investors.  I’m not saying that the era of relatively stable cap rates will last forever in the face of climbing interest rates but it does bear mentioning that in a true global economy, long-standing financial correlations can deteriorate….at least in the short term.


Winds of Change: Bill McBride of Calculated Risk is starting to get concerned about the direction of the economy

Over the last several years, the economic story has been consistent: Strong employment growth, steady economic growth (solid given demographics), low inflation, and an accommodative monetary policy – with no fiscal stimulus. I noted several times that the future was bright, and in late 2016, I pointed out that the cupboard is full.

However, tax changes that impact housing and now new tariffs that may lead to a trade war could mean that the economic story is starting to change.

Pop: Americans’ wallets fattened in January on recent tax cuts, indicating increased spending power may boost the economy this quarter as real disposable incomes in the US increase the most since 2015.

Disproportionate: Last weeks’ announced tariffs would help two smallish industries and hurt some much larger onesSee Also: Tariffs do nothing but hurt the White House’s pro-business agenda.


Family Feud: With Republicans all but extinct in California, a battle over state policy involving the development of housing is raging between older liberals (generally anti-development) and younger progressives (generally pro-development):

No Upside: US home builders are not happy with the recently announced Trump tariffs which will make steel and aluminum more expensive on the heels of the 20% Canadian soft lumber tariff announced last year.

Limited Impact: Mortgage rates have risen 8 consecutive weeks to their highest level in years.  However, early indications are that housing demand remains robust even in the face of mounting affordability issues.


Beating the System: I’m generally pretty good at predicting when a book that I read will make a good movie but I’ve never come across an article that I felt that way about….until now.  This amazing story about a septuagenarian convenience store owning couple who cracked the code of a state lottery game in Michigan and Massachusetts and made a $7.5MM profit over an 8-year period should definitely be made into a movie.  It’s a long read but will be the best thing that you read today.

Your Welcome: A new study claims that having two drinks a day is more likely to extend your life past your 90th birthday than exercise isBut See: Decades worth of research proves that the chemicals used to make bacon do cause cancer. So how did the meat industry convince us it was safe?

Clucking Weird: Chickens that wear diapers and have personal chefs are the latest elite status symbol in increasingly bizarre Silicon Valley.  Remember kids, when your poor it’s called crazy, when you’re rich it’s eccentric.

Chart of the Day

Submitted without comment


Big Bucks: A candidate in the race for a South Texas state House seat has reportedly received $87,500 in campaign donations — more than half of which is made up of deer semen.

Nap Time: Three day care aides in Chicago have been charged with giving kids sleep-aid laced gummy bears in order to get them to calm down for nap time.  As the parent of two toddlers, I still can’t figure out why they got in trouble for this.

All In The Family: A 39 year old man was busted having sex with his 19 year old daughter in their back yard, because (of course) Florida.

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