The Federal Reserve has increased the federal funds rate several times in 2022 from zero percent in March of this year. This has been the fastest rise in the funds’ rate ever and has begun to impact the CRE market. The public REIT stocks have already corrected with the FTSE-NAREIT All Equity Index down 27.93% through September 2022. Higher interest rates and a slower economy have revalued public REIT prices but not private commercial real estate values. Rising risk-free rates increase the weighted average cost of capital and when a company’s free cash flow is discounted at this higher cost of capital, the value of the company and its stock declines. The private CRE market is at a standstill and there are few transactions due to the large and widening bid-ask spread of property values. Therefore, private CRE values have not been corrected in line with the public REITs, and it may take another nine months to a year for these values to reprice lower.

Let’s say the 10-Year T-Bond rate is 4.0% as it was earlier this fall. With this higher risk-free rate, an average cap rate can be calculated from the cap rate formula, which is the risk-free rate based on the 10-Year Treasury of 4.0% plus a risk premium of 6.0% less the growth in rents of 3.0% or a cap rate of 7.0%. This is a general cap rate and needs to be further adjusted for the property type and location. However, a minimum cap rate for even the booming industrial market should be 5.0%-7.0%, and not the 3.0% to 5.0% currently in the market and for apartments cap rates should rise to 5.50% to 7.50%, versus 4.0% to 6.0% currently in the market.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.


Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join now!

  • Free unlimited access to's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including and

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2024 ALM Global, LLC. All Rights Reserved.