Real Estate

Real estate warning: beware the backward cap

NEW YORK, April 5 (Reuters Breakingviews) – In baseball, when fans turn their caps backwards or inside out it’s a kind of prayer that their team can turn its fortunes around. The commercial real estate industry has a different kind of backward cap – one that’s also a sign of a losing streak.

Anxiety over U.S. commercial property has been heightened by the collapse of two banks, one of which – Signature Bank – was an active real estate lender. Building-related debt has been the cause of crises before. Lehman Brothers’ purchase of apartment company Archstone in 2007 was one reason for its eventual bankruptcy.

The problem this time is a key real estate metric called the “cap rate.” Nothing to do with headgear, this rate reflects the yield on a property, comparable with the yield on a bond. The cap rate comes from dividing a property’s net operating income

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