Value May be Topping Out For Now

Recent stats suggest the real fun may be coming to an end. It appears the since may CRE values have begun to flatten or even decline slightly. It would seem this is due to a combination of things and may be more than a short term blip. Interest rates are rising over time and are up by around 100 basis points since the bottom several months ago.  While rates have seemed to flatten for the moment, there is no question they will be rising over the next few years and the ten year could go back to its more normalized levels or 5% or even 6% eventually. There is no certainty that the fed will unwind QE in a good way, and the flood of capital in the system is very likely to trigger inflation and possibly higher rates in a few years.  If Yellin gets the position, then she is likely to be in favor of continued easy money. It is unclear what Summers will do. However, economic theory strongly suggests that such a flood of liquidity in the system will eventually create an inflationary push up. That means more pressure on rates than would occur only form the normal improvement in the economy. As rates rise, cap rates rise accordingly and so there is downward pressure on values. When and how much is the great unknown.

The distress in the system is largely dissipated or moderated, so the number of foreclosures and deeds in lieu are greatly lowered and most owners have lost their assets or done modifications that will likely get resolved in a way that does not dump a lot more assets on the market at distressed pricing. The servicers are working through the pile of assets they did take back, and are not just dumping assets at this stage.