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Report Reveals Gains, Losses of Working in Post Cap Rate-Compression Era

GRAND RAPIDS, MI-Future real estate investment performance is unlikely to be facilitated by further cap rate compression; instead, capital flows to real estate will moderate and real estate upside will be more a function of investor success in increasing NOI, according to a new report.

By Brian K. Miller | Updated on November 01, 2005

GRAND RAPIDS, MI-Real estate capital flows as yet have shown no signs of abatement and have already broken record annual levels. Given the competition, both debt and equity capital have become inceasingly aggressive, supporting further cap rate compression and lowering yields. Eventually, this likely will lead to a moderation of capital flows to real estate, which will be positive for real estate over the long term but will be limiting in the short term.

That is the present and future real estate, according to “Expectations & Market Realties in Real Estate 2006,” a new 113-page report by Principal Real Estate Investors, Real Estate Research Corporation, and Torto Wheaton Research. GlobeSt.com was given an early look at the report online; the hardcopy will be out later this month.

As of the end of September, real estate capital flow has already broken record annual levels of sales transactions and CMBS issuance levels, according to the report, which is compressing capitalization rates. As a result, investment strategies have broadened, but debt and equity real estate capital markets also have become increasingly aggressive, resulting in high prices relative to reproduction costs, a proliferation of interest-only loans, and increasing financial leverage. The aggregate outstanding balance of US commercial mortgage debt has doubled over the past 7 years, according to the report.

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