Is This Growth Sustainable?

contrarianIn many areas of the country investors are faced with a surge of new investors trying to buy multifamily properties. Such trend is great for sellers but not so enticing for buyers because it puts stress on Cap Rates. Is this trend sustainable? Some are wondering if this is the new norm (Cap Rates continuing to go down) or if anything can happen to change its course.

I have seen this happen in CA, TX, WA, OR, FL, and GA. I know of two primary factors impacting the rise of value in real estate. First one, which is at the core of an artificial speculatory trend, is the market interest rate suppression of the Central Bank (Fed). When rates are low it leads investors to look at opportunities for higher gains. Thus, an investor that would typically invest in treasuries (govt bonds) would find these returns too low to even keep up with inflation. So, he’d start looking in areas where returns are higher, commercial R.E. being one of them. Therefore, it appears we’re now having a larger number of investors bidding prices up in the markets where the local economies have a positive outlook. In a nutshell, the Fed’s artificial suppression of rates leads to abnormal rate of speculation bidding up values of real estate and creating an unhealthy and unsustainable bubble.

It may not be the same bubble we have experienced in 2007 but nevertheless I believe it is a bubble. When will it pop is the question many of us would like to know but it’s not easy to predict. We may have an uptrend in value (meaning lower Cap Rates) for a while until that happens. There are still many newcomers entering the market at this time. We still have the Fed pumping money and expanding the monetary supply leading to interest rate suppression. Just look at the stock market. If anyone believes the growth of the paper assets sold on Wall Street is healthy and natural then it’s time to revisit economic history.

The most gains in real estate most likely occur shortly after a bubble bursts. Such event eliminates the majority of the market players leaving the profits to those few who can stomach the gloom and doom permeating the economic sector.

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One thought on “Is This Growth Sustainable?

  1. Pingback: Why You Shouldn’t Fear Another Bubble | Commercial Finance

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