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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 37 Figure 4 10 Year Treasury Rate vs. National Office Cap Rate Source: Reis, Inc., Federal Reserve 10-year Treasury rates increased briefly between early 2009 and early 2010 before trending downward again. Over this period, the correlation is still negative at -0.05, though the relationship is not as strong as we have observed in the two period periods that were analyzed. This is largely due to the fact that ten-year Treasury rates have continued to decline as the Fed props up the economy and investors around the world seek safe haven in Treasury bonds. Meanwhile, cap rate compression, though strong initially as the economy began to recover, has stalled a bit as prices have become very expensive, seemingly hitting a floor. Nonetheless, through three different intervals with both rising and falling interest rates, we observe a generally negative relationship between interest rates and cap rates, somewhat counterintuitive to expectations. Figure 5 10 Year Treasury Rate vs. National Office Cap Rate Source: Reis, Inc., Federal Reserve Metro-Level Variation However, what occurs at a national level in commercial real estate typically belies what occurs at a metro level. In reality, the US commercial real estate market is an amalgam of different metropolitan areas. These metropolitan areas have different underlying economic and demographic drivers, inventory sizes, and pools of investors. The large gateway metros1 typically have large, diverse economies (even though they typically have a few key industries driving these economies), the largest inventories, the largest number of investors, and the most liquid markets. Non-gateway metros usually have smaller, less diverse economies, smaller inventories, a smaller number of investors, and less liquidity. Consequently, we observe some performance differences across these two types of metro areas because these markets do not behave similarly. For the gateway metros, we generally observe relationships similar to what we observed at the national aggregate level. During the period of rising interest rates from mid 2003 to mid 2006 gateway metros had an average correlation of -.60 and all of individual metros had negative correlations. This average of -.60 is very close to the -.64 that we observed on a national basis. Interest Rates, Cap Rates and Commercial Real Estate Values


CRE Finance World, Summer 2013
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