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