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According to our Global Real Estate Strategy service, US CRE is only partly through its latest cycle. This is a liquidity-driven cycle; it will continue to benefit from investors’ search for assets that produce a steady income flow. Some markets are mature and have limited opportunities, while others are still in recovery mode and will provide good growth potential. More specifically, mainstream markets such as Manhattan, Washington DC and Silicon Valley have helped compress the overall average US cap rate.
These trophy locations are overcrowded with investors and sensitive to future interest rate normalization. Their ultra-liquid, ultra-safe attributes are partly bought for reasons other than pure investment returns. Cap rates in these markets have compressed more sharply and are now vulnerable to a correction in government bond yields.
However, there are plenty of opportunities in commercial real estate outside of the trophy markets that offer more attractive cap rates. Our real estate team prefers economically-robust secondary markets where real estate offers both high income and good value: Houston and Pittsburgh are good examples.
This post was originally published by the BCA Research blog.