Is it Possible to Short Cap Rates?

[Scott Trench]

Howdy,

I'm convinced that we are about to see Cap Rates crashing down over the next few years, especially with commercial property here in Denver. So convinced, in fact, that I'd like to put some money on this. 

How does one go about shorting Cap Rates in a given market? For example, I think that here in Denver, we are going to see commercial property Cap Rates rise drastically over the next few years. Now, the market fundamentals might just be so strong that the value increases or stays the same, but only because incomes and rents go up so fast. I believe that the CAP Rates will rise because they are so low that it is unsustainable. Some of these new entrants, especially the out of state guys (*cough - California) that are investing here via funds are likely to get caught with their pants down and there will be a sell-off soon in the starting towards the end of next year.

Is there a way to speculate on this with market instruments? 

[Account Closed]

Originally posted by @Scott Trench:

(Commercial Real Estate Crashing down - rates going up). 

Real estate will always find an equilibrium.  As much as you buy in the present market it still consists of ANTICIPATION of future events.  Most investors will not invest in anticipation of rent rate decreases.  Most investors will invest in anticipation of rent rate increases.  Maybe you are looking at an incorrect metric or it is not measuring what you think it is. 

Can rents and cap rates both go up and still see price and profitability go up?  Sure!

Cap rates are just numbers from a calculation. You need to understand why all the numbers are what they are. Definitely more complicated than saying buy NOI at high cap rates and sell NOI at low cap rates.