LOS ANGELES—“Cap rates will be higher in six months and a lot higher in 18 months,” David Shulman, a senior economist for the UCLA Ziman Center for Real Estate and UCLA Anderson Forecast, tells GlobeSt.com about what investors should expect next year. Shulman formed his forecast after the November election, which increased the probability the interest rates will rise next year.
“Our sense is that cap rates are going to go up because a 75 basis point move in the 10-year treasury will affect cap rates,” Shulman says. “We think the 10-year treasury could be 3% at the end of 2017, and that doesn’t look like a heroic prediction anymore. If that is the case, that means cap rates are going to go up by at least 100 basis points from where they are, and I think that is conservative. You have to remember that interest rates are going up 225 basis points form the election.”
This could mean trouble for investors, especially those that have recently purchased or will soon purchase new assets. “I don’t investors believe that, so I think that people buying right now are going to face far more risk than they faced a year ago,” adds Shulman. “But, I don’t think that they are thinking about a four-year treasury in 2018.”
Shulman expects interest rates to rise as well. The Fed already increased rates .25% in December, and will likely increase rates more often next year. “Before the election, people were assuming an environment of interest rates staying low and demand softening a little bit, but that everything would be fine,” he says. “Now, the underlying assumption is that the capital markets are going to be more difficult. Everyone was under the assumption that interest rates were going to stay low for longer. That assumption has been thrown out.”