Cap rates have moved up sharply since the Fed's rate hikes began in 2022, but they may still have further to climb.
That's the takeaway from recent analysis by First American Financial Corporation, where Xander Snyder, senior commercial real estate economist, notes that the speed of the increase has made it feel more dramatic than it actually is in a historical context. Even after the recent run-up, cap rates remain relatively low compared to long-term norms.
The firm's all-asset Potential Cap Rate (PCR) Model showed a "modest" increase in the first quarter of 2026, rising 10 basis points to 5.8%. That figure was unchanged from a year earlier. Meanwhile, actual cap rates came in closer to 6.4%, a gap that suggests transaction pricing is still lagging what underlying fundamentals would support.
Part of that disconnect reflects just how quickly the market shifted. Cap rates averaged roughly 5.2% in the fourth quarter of 2021, when borrowing costs were near historic lows. Since then, higher rates have forced a reset, but not a complete one.
Snyder says looking at cap rates alongside interest rates doesn't tell the whole story, but it does offer a useful directional guide. Using historical spreads to the 10-year Treasury, today's environment points to the possibility of further expansion.
"Based on the current 10-Year Treasury yield of 4.6%, if cap rate spreads reverted to prior, inter-recessionary levels, that would result in cap rates of between roughly 7% and 10%," Snyder writes. "The only exception is the spread from the 80s, when both cap rates and interest rates were high but falling roughly in tandem. Reversion to all-time average cap rate spreads would result in an all-asset cap rate of just under 8%."
If that kind of reversion were to play out, it would put additional pressure on property values across much of the CRE landscape. That risk is especially relevant in sectors already dealing with softer income growth or looming refinancing hurdles.
At the same time, volatility in the Treasury market is adding another layer of friction. Snyder points out that swings in yields tend to push cap rates higher, largely because they make financing harder to pin down.
"The main channel is financing uncertainty," writes Snyder. "If buyers don't know what their final loan rate will be, since with high volatility the final rate can change meaningfully between the onset of due diligence and rate lock, they need a larger margin of safety. That widens bid-ask spreads, which means fewer deals meeting sellers' valuation expectations, fewer deals getting done, and cap rates needing to rise to attract more demand to the CRE purchase market."
That dynamic has been playing out in transaction markets, where deal volume has remained subdued. Buyers are underwriting more conservatively, while many sellers are still holding onto yesterday's pricing, slowing deal pace and delaying broader price discovery.
Another factor is timing. Cap rates simply don't move as fast as interest rates. Treasurys reprice in real time, but commercial real estate transactions take months to negotiate and close. As a result, changes in the capital markets are reflected in property prices with a lag.
Snyder notes that if higher Treasury yields persist, NOI growth underperforms expectations, and credit spreads widen, "the case for higher cap rates becomes stronger." In that scenario, the market may still be working through a longer adjustment cycle rather than nearing a clear endpoint.
For now, cap rates have clearly reset from their pandemic-era lows. The open question is whether this is close to where they settle—or just another step on the way up.
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