The Real Estate Capital Scoreboard® – May 2021

Chicago, Illinois, May 1, 2021 – The nation reaches a milestone of one-third of the population vaccinated while financial markets hit new high records. Rising interest rates accompanied by tightened pricing and profit expectations prevail. Fewer new real estate projects come online due to pandemic uncertainty and increasing construction costs. Other key real estate capital trends include:

Favorable Financing Reemerges: Lenders see limited losses from the pandemic, readjusting expectations of improving economic conditions. As a result, even as interest rates rise, mortgage spreads drop. Borrowers still capture desirable debt terms, staying within the 3.5%-range for longer-term debt based on 65% or less debt. Proven cash flow performance drives leverage and pricing terms.

Prices Stubbornly High: Due to limited inventory, cap rates drift downward. Investors refuse to sell highly performing assets. Buyers simultaneously chase down yields for the few investments listed on the market. As prime multifamily and industrial cap rates declined by as much as fifty basis points from last year, the feeding frenzy continues. Furthermore, lodging assets recapture pricing with improving economic conditions. Lastly, retail and office properties remain highly speculative as consumer shopping and workplace habits evolve.

Longer Holding Periods: With fewer investment opportunities available, owners recalibrate holding term expectations to include longer cycles. For instance, shorter-term holds spanning three to five years expand by two years or more.

Mr. John Oharenko of the Real Estate Capital Institute® notes, “Quick-flip profits based on shorter-term cycles rarely exist today, as more sophisticated investors scour markets for deal flow.”

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