Are property valuations chasing future rent increases?

First, let pictures (charts in this case) speak their 1,000 words. 

Commercial property market valuations, in almost all categories, have eclipsed 2006-2007 picks. 

Valuations are even higher in key markets like Tri-State, Boston, Washington DC, Southern California and San Francisco.

" Capitalization rates have dropped to historical lows of 3% to 4% for industrial and multifamily deals in particular." Orange County Business Journal wrote on March 16, 2015.

Yet the largest and most sophisticated investors, led by pension funds, private equity funds, and insurance companies, are in the midst of buying spree.

The rational on the part of buyers? Potential rent increases in the near future. It seems the largest aggregators of capital believe in the continuing economic growth.

The Secrets to Valuing Hot Tech Companies.

This week Bloomberg Business shed some light on on this.

The opinion was built around a photo-messaging app raising cash at a $15 billion valuation. Bloomberg Business doubts that this company is actually worth more than Clorox or Campbell Soup and was curious where did investors come up with that enormous headline number?

Here's the secret, Bloomberg thinks, to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they'll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round's valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet. 

Our own opinion? The above is not exactly a great confidence builder.

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Is the deleveraging over?

Economic growth may go into higher gear if U.S. households are finally done deleveraging  There may still be room for more deleveraging as well. These processes may impact inflation, interest rates, commodities, retail and housing activities, equity markets, debt markets, etc.

The charts above (click to enlarge) look at the current state of consumer finances. The chart on the left shows the makeup of the household "balance sheet" and the top right chart shows what percentage of disposable income is spent on debt service, highlighting the consumer deleveraging we have observed over the past few years. The chart on the bottom right looks at household net worth, which is the sum of all assets, including home equity, less all liabilities.

Chart: Market Insights. 1Q 2015. JP Morgan Asset Management

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.