- 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
Randolph is a Multifamily Investment Sales Broker with eXp Commercial servicing Multifamily Buyers and Sellers in the Greater Chicago Area.