Despite cap rate compression over the last 24 months, cap rate spreads over 10-year U.S. Treasuries have actually been increasing since the middle of 2011. Does this mean markets are reflecting rising risk in commercial real estate investing?
The spread between cap rates and Treasury rates reflect the premium demanded by investors from investing in a relatively risky asset like commercial real estate, vis-à-vis keeping their money in risk-free assets like bonds backed by the U.S. government. Increasing spreads therefore reflect heightened risk. (The recent global downturn has, of course, redefined the term “risk-free assets,” particularly when applied to sovereign debt, given heightened perceptions of default risk.)
Read more...Bigger Cap Rate Spreads Hint at Risk via NuWireInvestor.com