Will Rising Interest Rates Put Upward Pressure on Cap Rates?

Interest Rates and Cap Rates Not Directly Correlated

• Some investors think sellers must raise cap rates when interest rates increase in order to draw in enough buyers
• This has not held up historically, spread between interest and cap rates have varied significantly
• Yields can vary greatly by property type and market

Many Factors Currently Impacting CRE Yields

• Elevated liquidity forcing investors to compete for assets, willing to accept lower yields to invest capital
• Stock market volatility likely to drive investors to stability of CRE, putting downward pressure on cap rates
• Property types and markets with momentum or value-add opportunity draw new interest, keeping cap rates steady

Investors Need to Consider Future CRE Trends

• Demographics to reshape CRE; Retiring Baby Boomers and aging Millennials will drive certain property types
• Paying a premium now could provide opportunity for elevated returns over next few years
• Upward cap rate momentum in some markets and property types expected, unlikely to be broad-based

*Through May 11
Includes apartment, retail, office, and industrial sales $1 million and greater
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve

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