"Justifications" for buying property at a low cap rate
This is an interesting theory I came across today. The gist of it is that deals have been done at high prices (the so-called "Blackstone Effect" from its EOP acquisition) under the theory that you are buying the property for its future value based on the assumption of continuously rising rents.
I call that kind of thinking risky, except maybe in the scarcest markets (Manhattan, maybe downtown SF, central London, etc.) and perhaps even there to boot. In the 1990s everyone thought rents would never go down and that demand would always exceed supply. El-wrongo. Now this is a completely different market from fifteen years ago, but as Santayana wrote (a phrase that, alas, Jim Jones co-opted in his tragic camp in Jonestown), "Those who cannot remember the past are condemned to repeat it."
I call that kind of thinking risky, except maybe in the scarcest markets (Manhattan, maybe downtown SF, central London, etc.) and perhaps even there to boot. In the 1990s everyone thought rents would never go down and that demand would always exceed supply. El-wrongo. Now this is a completely different market from fifteen years ago, but as Santayana wrote (a phrase that, alas, Jim Jones co-opted in his tragic camp in Jonestown), "Those who cannot remember the past are condemned to repeat it."
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