Chicago, Illinois, June 1, 2015 – Good News Bears stomp out Bad News Bulls as investors now worry about how good times keep getting better.  Rates are still low, but investors grow increasingly skeptical such trends will continue, including the following:

•   “Cap Rates are not capped” – Dipping below 5% for credit-tenant properties and core assets is no longer impossible.  Low mortgage ranges along with insatiable appetites for all type of cash-flowing commercial real estate drive record-high pricing, even above 2006-2007 levels.  1031X buyers prevail for smaller deals, while institutional players try to expand more into urban-infill assets, where product availability is scarce.   Less pricing differential for primary vs. secondary markets, as long as asset quality and store sales performance [e.g., retail] reflect solid results.  Astute owners are pruning their portfolios, mainly selling assets in smaller, less strategic markets to take advantage of current risk-pricing dislocation.

•   “Flat spreads” –  As commercial property markets steadily improve with the retail sector leading the way, mortgage spreads between various property types flatten out.  Overall spreads start as low as 120 basis points over comparable-term treasuries for low leverage loans (below 50% LTV); 150-170 basis points for moderate leverage (65% LTV) and under 220 basis points for full leverage loans (75% LTV).  With rates remaining in comparatively low ranges over the past few years, more owners comfortably stay with floating-rate debt.  As with equity markets, little pricing differentiation for mortgage rates in primary vs. secondary markets.

•   “Replacement costs count” – Peaking property values ignite more new construction demand:  More and more, cost-equals-value formulas drive investment decisions. Developers and tenants find new construction more appealing.  In particular, users are driven to high-density urban areas near public transportation.  Automobile parking lots are shrinking, while bicycle racks grow.

Jeanne Peck of the Real Estate Capital Institute® , suggests, “The party continues as owners and sellers enjoy the best capital market ride in years.  When will the music stop?  No one knows for sure, but why worry — just go with the flow!”