Cap Rates Reveal Opportunistic REIT Property Sectors

Cap rates are one of the best indicators of forward returns in REITs. It is not 1 for 1 in the sense that a 5% cap rate does not translate to a 5% forward return, but a higher cap rate at purchase will, all else equal, result in higher forward returns. Generally speaking, it is a bad time to buy REITs when they are trading at low implied cap rates and a good time to buy when they are trading at high implied cap rates. We will show this has borne out in recent history, but let us first define implied cap rat ...