With the recent jump in interest rates, cap rates have no where to go but up.
Since the end of September, the 10-year Treasury note has increased by 60 basis points, or 38%, to 2.22% yesterday. More than half of that increase occurred after the results of the presidential election. It seems that Trump’s pro-business reputation is making investors believe that increased infrastructure spending and economic growth will soon be upon us, followed by inflation. It doesn’t usually happen that fast. That said, with the recent jump in rates, it is almost a certainty that the Fed will increase short-term rates within a month. And there is now talk of further rate increases next year. So what does this say about the seniors housing and care M&A market? There is little chance that cap rates will decline next year, and even though there is never a perfect correlation between changes in interest rates and cap rates, the odds have increased for a 25 to 50 basis point increase in seniors housing cap rates next year. If so, that will certainly put a lid on values, and could cause some sellers of high-end properties to wait for a better time. But it may be a long wait.
