Would further interest-rate cuts lower the cap-rate spread throughout the remainder of the year? That depends on when the cuts occur, and how much they change.
Let’s start off by stating the obvious. No one knows what the end of the year will look like in terms of any of the drivers of market dynamics, and by that I mean the 10-Year Treasury, interest rates or cap rates.
We can make educated guesses about the outlook, but the truth is that there are some powerful–and potentially contradictory–macro forces swirling around the real estate market right now. First is the continued good health of the overall economy and employment. On the flip side, the back and forth taking place inside the Beltway and the worrisome fact of trade wars that threaten that solvency in coming weeks and months. These opposing forces are strong and clear enough to reduce accurate predictions to guesswork.
Let’s put the guesswork aside and deal in facts. Here’s what we know. We know that the Fed is in a mood to cut rates, and that’s a good thing. We also know that the 10-year and the cap-rate spread aren’t in lock step. The latter can rise and fall with the fluctuations of supply and demand and, despite the summer doldrums, supply and demand remain relatively strong, as we stated in our Q2 Cap Rate Report.
Would further interest-rate cuts lower the cap-rate spread throughout the remainder of the year? That depends on when the cuts occur, and how much they change. It’s likely that any cuts–or increases for that matter–that come our way are more than likely to be small. According to Calkain research, we know that cap rates lag interest rates by about 90 days. So it’s possible that the impact of any rate movement won’t be felt until Q1 of 2020.
The net lease market remains strong in terms of supply and demand. We know that interest rates remain at bargain-basement levels, making it a great time to be a borrower. We know the Fed is in a mood for decision-making that can only aid the sector. All these knowables accrue to the plus side of the column.
It remains to be seen if our elected officials on both sides of the aisle will create policies impacting the market. Just as it remains to be seen what will happen with interest rates and when any change is likely to happen.
For us at Calkain, which means as far as we advise our clients, we’re betting on what we know and that is that the single tenant net lease market continues to be strong and remain a reliable long term investment.