Why Cap Rates May Go Lower: EXCLUSIVE

MIAMI—David Lynn specializes in just about every asset class. The CEO and co-founder of Everest High Income Property works in mixed-use, multifamily, retail, office, hotel, industrial, urban redevelopment, raw land and large-scale developments.

With such vast experience, GlobeSt.com caught up with Lynn to get his take on where we've been—and where we're going—in the capital markets in part one of this exclusive interview. Be sure to come back to this afternoon's Miami edition, where Lynn will share more predictions about the lending environment, investment strategies and tertiary markets

GlobeSt.com: How would you define 2014 from an investor's perspective?

Lynn: I think it was a very good year. Things turned out better than we thought. Rates stayed low. There was strong investor enthusiasm across the board. Fundraising was strong. We've been calling this a recovery for six years, but it is still gradually improving, and returns for the year have been good—better than expected. Everyone kept waiting for “the other shoe to drop” but none did. 

GlobeSt.com: How will that change in 2015? Or will 2015 mirror 2014?

Lynn: I think rates will remain low in 2015, as we have a lot of overcapacity in the economy.  We don't have a lot of inflationary pressures, which is unusual. We have “Goldilocks factors” in real estate—the market is not too hot, not too cold, good tasting porridge. 

The price of gasoline has dropped 25% last year. There's increased oil in the US now. There is no strong wage inflation on the horizon. Businesses are continuing to gain confidence. 

You'll see more investment, more leasing, more space sales. More hiring will continue—not terribly exciting, but sustained recovery for real  estate. There is ongoing investment demand.  Globally, markets are not overheating. 

GlobeSt.com: What factors do you see influencing investor strategies?

Lynn: Again, investors want income. Bad memories are seared into the minds of many investors and particularly many Baby Boomers who feel they cannot recover from the kind of downturn we had in the recession. So more people are looking to real estate now as attractive investments—private and public. 

Supply is still good. There is some oversupply on multifamily. However, there is still a lot of demand yet. Millennials are moving out of their parent's house, so we do see new households forming. 

We've had an up cycle for five years now.  We still have some room to grow.  Cap rates might even go lower because there is a lot of capital out there searching for the right investment.  Stocks are very volatile, so real estate is good in comparison.

I say that with a caveat that it will be more competitive, with more capital out there. It will be more challenging to find properties and yields investors want. But even as rates gradually rise, spreads are still attractive.