Tuesday, November 4, 2014

Cap Rates Falling

Investment properties in most markets are increasing in value.  One good measurement of this is the cap rate, which is a proxy for the riskiness of the project--the lower the cap rate, the higher the price that an investor will pay.  In four of five major categories measured for commercial and investment properties, cap rates declined from 2013 to 2014.

Why is this happening?  There seems to be a surge in the market of 1031 exchange buyers; i.e., people who are trading one investment property for another, in order to defer taxes.  The rules are very strict, and there is currently more demand than available product, which pushes up asking prices.  That, in turn, causes cap rate to decline.  Other factors that affect cap rates are lease length, tenant credit worthiness, and interest rates for long term money.  If you are planning to buy, you'd better start looking now!

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