A legend before the fall

Written by David E. Lakvold, MAI, SRA on August 25, 2023

Picture investors huddled around their spreadsheets, nervously eyeing those escalating rates. The once-comfortable risk-reward teeter-totter turns into a wild seesaw, throwing even the most stalwart investors into a frenzy. As rates rise, property values nosedive, and suddenly, those prized pieces of real estate start feeling as valuable as a anchor on a sinking ship.

Are you prepared for a real estate rollercoaster ride that would make even the bravest souls reconsider their investment choices? Capitalization rates, those mischievous numbers, are donning their climbing boots and plotting their ascent. Brace yourselves for chaos, the crime of capital loss, the dark night of the sold.  

Oh, the tragedy! Property values, once ascending into the heavens find themselves plummeting to the pit like fallen angels. The sin of perpetual growth exposed, speculators now quiver under the pressure of rising rates. It's as if these investments have flown into the Bermuda Triangle and equity is forever lost at sea never to be seen again.

Meanwhile, in the land of lost, bargain hunters rejoice! An oversupplied market of distressed sellers and desperate developers creates an abundance of investment deals that can only be described as a whimsical wonderland of opportunity. The higher the rates, the lower the asking prices, and suddenly, even the strongest bend under the weight of change and succumb to the reality of rising rates.

But wait, there's more!
Developers who once dreamed of erecting monuments that touched the sky find themselves grappling with an altered reality. Their grand vision poked in the eyes. 
Nothing but tears after the serial killer of investment capital, rising capitalization rates, brings another well-planned project down in its prime.  

Like a Greek tragedy, investing in commercial real estate can be a twisted tale.  Capitalization rates never go up, just down.
Reversion to the mean?
Oh no, that is a thing of the past. 

Late in a growth cycle, rates start to hover. 
A little creep up, a pause, a sense of uncertainty. 
Soaring values meet their fate in a dark alley. 
The reality of reversion, a fatal shot.
Expectations come crashing down like a meteor.
No one expects the capitalization rate inquisition! 
My advice, grab a bag of popcorn and watch the tragedy unfold, hopefully unscathed.
This pending market turmoil would make Shakespeare raise his pen and write....

Alas, poor investor, I knew him well.
A fellow of positive returns no more

September 2023 Update

The graph below shows the percent change in appraised values of anchored retail, hotels, and apartments.  What changed?  The cap rates.  These graphs were obtained from CoStar and show a distressing trend.

The graph below shows a more disturbing trend for offices.  This graph was obtained from CoStar.