The Hand That Rocks The Caps

Howard

Economist Adam Smith is famous for, among other things, his description of the Invisible Hand and its role in the markets. People who know a lot more about economics than I do have been debating the meaning of the Invisible Hand for years, but in general it means that the market as a whole is smarter than any one individual (my interpretation).

What brings this to mind is all the discussion lately about cap rates and how they are approaching and sometimes reaching the same cap rates that we enjoyed (or suffered) right before the economic collapse. Concurrently, prices for top-quality assets are approaching and sometimes equaling those pre-crash levels, which has prompted a lot of comment about whether today’s caps and the prices are justified. Just so you know where this blog is going and don’t get disappointed when you reach the end: I don’t know the answer to that question.

But what I’ve been wondering lately is whether the Invisible Hand is at work in setting these declining caps and rising prices. One of the popular terms today is “outliers,” which means a person or an event that lies far afield of the norm, whether for good or for ill. One of the questions people have been raising about the falling caps and rising prices is whether they are outliers or just the result of good, old-fashioned, Adam Smith supply-and-demand economics.

Here’s a description of the Invisible Hand from Wikipedia: “The theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.”

So, maybe, if the Invisible Hand is at work setting today’s cap rates, the entire industry will benefit in the long run. I don’t know that answer to that one, and I suppose no one will until we can look back at this era with hindsight.