Cap Rate Compression

Cap Rate Compression: In simple terms, demand has outreached supply in this interest rate environment. From 2002-2003 a Walgreen’s deal ( or Investment Grade) went from around 8% + cap rate down to -6-6.25% cap rate, and in some instances sub 6% cap rate. Post 2007 cap rates moved upwards into the area of 7.25-7.5% (Investment Grade) sometimes higher depending upon the motivation of the seller, usually a developer looking to get out. Fast forward to today, the supply pipeline is limited with enormous amounts of capital looking for deals. We’re in the lowest interest rate environment and we’re seeing pre-recession pricing mistakes, if you’re a buyer! Investors are chasing yield, yet we’ve seen nearly a 150 basis point compression the last 18 months. So what gives? If interest rates have to go up, and you’re buying into the pre 2007 market prices, do you have an exit?

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