Two roads diverge: In chasing yield, are investors focusing on long-term returns or merely fleeting gains?
Plan sponsors are faced once again with the familiar but unwelcome dilemma of choosing between two roads: short-term yield gains or superior long-term income growth. In today’s low interest rate environment, the temptation to chase higher near-term yields is enticing now that memories of the 2008 financial downturn are fading. Both Treasury and corporate yields have declined significantly since September 2007 and, not surprisingly, high-yield bond issuance has set new records. All of this leaves investors high and dry in the search for yield.
Commercial real estate investors face the same problem — and, as cap rates in gateway markets have declined, the siren song of higher yields are luring investors back to secondary and even tertiary markets. But this may be a short-lived euphoria.
Increasing activity in these markets is driving down the spreads between gateway and non-gateway metros. For example, the spread between the capitalization rate on