Will Cap Rates Chase Interest Rates Lower?

  • Could low-interest rates and elevated capital flow into commercial real estate compress yields?
  • Uncertain economic outlook and the traditionally limited alignment of cap rate and interest rate movement point to cap rate stability
  • Asset pricing and yield will balance strong fundamentals against perceptions of future economic risk

Macro Factors Place Downward Pressure on Cap Rates

  • Lower interest rates widened the yield spread, enabling buyers to underwrite more aggressively
  • The increased flow of capital to CRE heightens demand for assets, placing downward pressure on cap rates

Interest Rates and Cap Rates Do Not Move in Lockstep

  • Historically, cap rates and interest rates don’t move in direct tandem – ’13 interest rates rose but caps fell
  • A prolonged stretch of falling rates, however, could support further cap rate compression

Wide Variance Across Property Types and Markets

  • Apartment, STNL and well-located Industrial could see modest downward pressure
  • Local market forces matter – Economy, population trends, legislation, etc. influence the outlook



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