Déjà Vu All Over Again

BEVERLY HILLS, CA-Being an avid Bosox (and Dodger) fan it was wonderful to see the Sox win the series in Beantown after 95 years. The great Yogi Berra would no doubt have a perfect saying for what I believe 2014 will look for investors: “Déjàvu all over again.” Given what is happening on a macro and public policy level, it appears likely that 2014 will be much like 2013, with a few nuances.

In this economy, carefully managed by the Federal Reserve, with Janet Yellen about to take the helm (who is basically Bernanke 2.0, only more dovish), many financial analysts opine that interest rates will stay low longer, perhaps until unemployment hits 6% according to Rosen Consulting Group. In this scenario, 10-Year Treasuries hover around 2.5% – 3.0% and cash will likely continue to be plentiful with debt remaining relatively cheap. The spread between treasuries will remain historically wide, which should continue to keep cap rates low. With inflation in check and interest rates low, fear takes a back seat to greed. Investors, hungry for yield, will venture further out on the risk spectrum as they look for inefficiencies where they can optimize risk adjusted returns. This places a premium on product and submarket knowledge and expertise. Management, development, and operational expertise will be key differentiators for investors seeking stronger yields. From a capital source perspective, foreign capital demand for U.S. real estate is global and looking for a variety of opportunities, not just trophy. Trophy properties and large office building and portfolio dispositions grab headlines and interest from foreign capital because they have sizzle and are an efficient way to allocate large amounts of capital. Trophy properties also generally facilitate capital preservation which is first and foremost on the agenda for core investors. This intense demand for core and core plus properties, which is fueled by oceans of money chasing a desert of offerings, has pushed property values to frothy levels.