Impact of Interest Rate Cuts on Real Estate Cap Rates

Now that the Fed is starting to cut interest rates, how will real estate capitalization rates react? Conditions that facilitate changes in short-term policy rates influence the long-end of the yield curve, which in turn most influences real estate investment activity.

A CBRE Econometric Advisors (CBRE EA) review of cap rates since 1995 shows that for every 100-basis-point change in the 10-year Treasury yield, cap rate movements range between 41 basis points (bps) on average for industrial assets to 78 bps for retail assets. Office cap rate movements averaged 70 bps, while those for multifamily assets averaged 75 bps.

The fact that industrial assets were the least sensitive to long-term interest rates can likely be explained by the level of investor demand for logistics assets throughout the period. Prior to 2010, industrial assets were not in such high demand, leading to less cyclical cap rate compression. Following the COVID pandemic, however, strong fundamentals that supercharged demand for the sector kept industrial cap rates from climbing as much as those of other sectors. This structural shift in demand for industrial space boosted NOI growth and reduced risk premiums.