The current 10 years treasury rate is 5.1 percent; Cap Rates on San Francisco office buildings are running around 5.5 percent.
On the one hand, rents rise, meaning that the expected IRR on a San Francisco office building is higher than 5.5; on the other hand, buildings depreciate and need to be recapitalized, meaning that net stablized net cash flow growth will be less than market rent growth. While office rents in San Francisco rose smartly last year, they had been stagnant for serveral years before, and office buildings always have the potential for substantial vacancy. So would I buy an office building at a 40 basis point spread over Treasuries? I don't think so...
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40 basis points over treasuries???
I was so proud I got a client 88 over the 10 year on a fannie mae fixed rate humdinger (can't remember the swap spread)that I nearly had a stroke.
P.S. Do you know of a good resource that explains in a straightforward way how the pricing works on fannie mae fixed rate apartment loans? (Something you don't need to be a bond trader to understand?)
How about a -310 bp spread? SF apartment buildings are selling at cap rates around 3 at the moment. You can assume some NOI increase as units come off rent control, but still...
Criminy -- bad math. That should be -210 basis points.
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