Apartment property owners have been lulled into a false sense of complacency

According to a chart of long term relationship between cap rates and interest rates (Treasury bills), this may be the time to start planning on a new strategy for investors of commercial real estate, particularly multifamily.

As the following chart shows, the relationship of cap rates to the Treasury bill rate is generally consistent over time (about twenty five years, in this chart). The T-bill rate goes down, cap rates go down.

If cap rates go down, property values go up. Values are calculated, generally, as the result of cash flows (known as "net operating income", or NOI). Divide the NOI by a market cap rate for the property, and the result is the value. Divide by a larger number, the result is a smaller number. Cap rates going up means values go down.

So, please raise your hand if you think T-bills will continue to stay low, or go lower. No one is raising their hand?  You think interest rates will go up in the next couple of years?

So do I. The chart will add new years on the right, with an upward trend, pushing up cap rates -- which will push down property values.

In other words, we're at the top of property values for apartment properties now, and higher interest rates will reduce cash flow and buyer pools, making it harder to sell your property and move into a new strategy.

There's a second observation from the chart above. The difference between cap rates for commercial properties and T-bill rates suggest the time to buy and the time to sell. In 2006, the gap was the smallest shown on the chart, 230 basis points. In 2012, when it was good to buy (we know that now), the gap was the largest, 630 basis points. The gap is narrowing now.  The good bargains are behind us.

Think back to 2006, if you can. If you knew that the economy was going to fall off a cliff, what would you have done then?

I know that the Fed says that they will slowly raise interest rates, when they do. But history shows us that no one, not even the Fed, controls global economic events. China, Greece, the Mideast, Russia, all stack up to at least one catastrophe that we aren't expecting today.  I'm betting on unpredictability, not certainty. In 2006, no one I talked to thought the financial system would fail, cratering commercial real estate values.

Of all the commercial real estate food groups (office, retail, industrial and multifamily), the apartment owners feel the most secure. The others struggle with vacancy, financing, and low lease rates.  But the time for complacency of apartment owners may be coming to an end.