The Weakening Link Between Cap Rates and Borrowing Costs

Chad M. Firsel

CHICAGO—The Federal Reserve’s recent shift in interest rate policy has been met with a sigh of relief by the commercial real estate industry. After all as rates rise so do borrowing costs as well as cap rates. Or so the conventional wisdom has gone. In a recent report the Chicago-based Quantum Real Estate Advisors decided to investigate the correlation between cap rates and interest. It found that it may be weaker than many had believed.

This may come as a surprise to economic historians who can point to a historical correlation stretching back some twenty years. The difference between then and now, however, is that institutional demand for commercial real estate is much stronger and there has been a shift in the acceptable level of leverage to finance deals. The result, Quantum Founder Chad M. Firsel tells GlobeSt.com, is that cap rates and borrowing costs have become far more insulated from one another, which has not been the case in prior years. “Interest rates have become pari passu with cap rates,” he says.