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  • Deborah Luedy

The Cap and Treasury Tango

Updated: Jun 5, 2020


My colleague shared with me her experience with ballroom dancing and how that experience emerged a thought provoking comparison. For a brief period of time ballroom dancing lessons were a part of her life. It was an uplifting experience that included her swirling feet and flailing arms. The demanding proper position of her head felt more like being ridge over stylized form. She admitted that she was no Ginger Rogers or Kym Herjavec Johnson from Australia’s equivalent of Dancing with the Stars.

You are probably wondering how her days on the ballroom dance floor, real estate cap rates and treasury rates have anything in common. The 10-Year Treasury recently yielded below 2.4% while at same time cap rates in many real estate segments are still hovering in the 5 cap range. And recently we learned that the S&P 500’s dividend yield was averaging just above 1.8%. When you have these very low returns as with the Treasury and S&P, creating a low-cost income stream along with low cap rates within the commercial real estate markets, it becomes very difficult to ‘earn’ a return let alone a living return.

As such, pension funds and insurance product investing in real estate will need to continue to look for other opportunities to find satisfactory returns. If today’s sellers maintain higher price points with lower cap rates, then their job in finding attractive real estate assets will be even more challenging than it may already be.

Thus upon reflection, with the ask/bid pricing differentials existing between buyer and seller, and while the cap rates are still hovering low for many asset classes, it seems like those days on the dance floor on how to make sense of it all and still look good for a positive on your two feet outcome.

Refer to these additional resources from Thomas Franck (@TOMWFRANCK), Investment Reporter at CNBC as well as this recent report from Deloitte:

https://www.cnbc.com/2019/03/25/us-bonds-treasury-yields-move-lower-ahead-of-economic-data-auctions.html

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Real%20Estate/us-expectations-market-reality-real-estate.pdf

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