September 12, 2019
With President Trump banging the podium, calling the Fed “boneheads” and demanding “zero or less” interest rates and Alan Greenspan (yes, he’s still alive) opining that negative interest rates wouldn’t be a bad thing for the U.S. economy, investors must wonder whether or not the ‘fix’ is in.
The Fed’s benchmark overnight lending rate is currently between 2% and 2.25%. The President has repeatedly demanded it be brought down to equal that of other G-7 nations, all of whom are near zero.
So, what does this mean for Delaware Statutory Trusts and the people who invest in them? First and foremost, more cap rate compression. Just when you thought the party was over and cap rates had to go back up, it looks like the real estate market may be able to squeeze a bit more mileage out of the historically high prices they are paying for new acquisitions (particularly in multi-family) and low yields.
As mentioned previously, at the end of 2018 and beginning of 2019 cap rates did begin to rise (meaning prices fall) in primary markets like: New York, San Francisco, Los Angeles and Chicago. In commercial real estate, the tail never wags the dog. Primary markets always respond first to major sea changes with secondary markets following suit after a lag of 6-9 months.
Near term, this trend appears to be reversing itself. With a Presidential election in the offing and historically unprecedented public pressure being exerted on the Fed to drive rates down, DST investors can probably anticipate more cap rate compression near term.
This means that even in fully priced market segments such as multi-family you may reasonably expect more appreciation. How much, only time will tell.
However, we do not believe ever cheaper money will really juice the economy. It may keep a recession at bay but as in the Obama years, not stimulate significantly more growth. This is because debt levels in both the public and private sectors are at historically high levels. So lowering interest rates even more is like pushing on a string.
Therefore, we believe it wise for DST investors to focus on the present and the higher cash flow available in other commercial real estate asset classes that may not be priced at such premiums.
To mention just two, hospitality and senior assisted living properties often sport acquisition cap rates 200+ basis points higher than the current multifamily average of 4.85%.
These significantly lower acquisition prices result in correspondingly higher cash on cash returns which is of immediate value to investors. They also have significantly more room to compress if the powers that be prevail and follow Europe by pushing interest rates below zero.
Robert S. Smith
This material and views are prepared solely by the author and does not necessarily represent the views of the its affiliates. Statements concerning financial market trends are based on current market trend, which will fluctuate. Projections are inherently limited and should not be relied upon as an indicator of future results. Historical figures and performance are not indicative of future results. This is for informational purposes only and does not constitute an offer to buy or sell any investment.
DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Peregrine Private Capital Corporation is independent of CIS.