Interest Rates and Cap Rates? It's Complicated

“Although cap rates tend to rise with interest rates, the causation is not as direct as the theory would suggest,” writes Denham.

NEW YORK CITY—Three commercial property sectors, three different cap rate stories amid the same three increases in the federal funds rate over a six-month period. What these stories have in common is that they did not play out in lockstep with the Federal Reserve’s 25-basis point rate increases this past December and in June and March of this year. “Although cap rates tend to rise with interest rates, the causation is not as direct as the theory would suggest,” writes Barbara Denham, senior economist with Reis.

In three separate reports focusing on cap rates in the multifamily, office and retail sectors, respectively, Denham reports that mean cap rates actually showed declines for multifamily and office during Q2 and a downward trend in the 12-month rolling average for retail, by which point two of the Fed’s three rate increases would already have gone into effect. From there, though, the longer-term stories diverge.