If you’re an investor counting on the traditional action and reaction of cap rates, capital flows and interest rates to land on the sweet spot of cap rate compression, Spencer Levy wants you to know that the world has changed.
“The focus on capital markets and believing you could control the numbers, that data analysis was everything, this was right until five years ago,” Levy, CBRE’s chief economist, declared in a keynote presentation at GlobeSt.’s net lease conference in NYC on Wednesday.
“In the past three or four years, the economy has outperformed what we expected. The labor market has been tighter, wages have gone up. As an economist, I think that’s great,” Levy said. “But as a real estate professional, I was hoping for something better. I was hoping for interest rates to come down.”
Recommended For You
“Now, we have to shift from a capital markets focus to an operations focus, even in the net lease business,” he said. “Not only is the short end going to stay high, the long end is going to stay high, around four percent, and cap rates are going to stay sticky high.”
“Most returns over the last decade were made through cap rate compression,” Levy said. “Most returns in the next decade are going to be made by operating more efficiently and raising the bottom line.”
The CBRE global guru's main point is that the world has changed. The shift from a business of long-term stable assets to ones that require the ability to nimbly manage operational costs needs to happen quickly, as Levy projects that the top priority next year will be to offset higher operating costs.
“Next year, you’re going to be used to a higher interest rate environment and you’re going to try to operate more efficiently to raise your income to compensate for higher operating costs, including the cost of labor, materials and property insurance,” he said.
“The costs in certain asset types and certain markets have gone haywire,” Levy said.
“Multifamily property and casualty insurance costs in some areas of Florida went up 400% in the last four years. That the kind of cost that’s going to change the way you do business,” he said, noting that some multifamily owners and operators in Florida are responding by self-insuring or forming captive insurance companies.
“Picking the right asset type matters much more than picking the right market in terms of your returns than ever before,” Levy said.
He added that investments in manufacturing on a triple-net basis in the upper Midwest and commercial real estate in Mexico are great bets in the current environment.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
