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CAP Rates Poised to Move Upwards as Investors Shift Risk Tolerance

State of the Current Market

Interest rates have continued to increase and are now near mid-2008 levels. National CRE price growth is slowing on a quarter-over-quarter basis. Due to this, the PCR model shows that cap rates are poised to move upwards as investors shift their risk tolerance. This will be a shift to a “new normal” in terms of price growth and CAP rates.

What Affects CAP Rates?

CAP rates are based on the historical relationship between interest rates, rental income, prevailing occupancy rates, and recent property price trends.

Recent Research Findings

According to the First American Potential Cap Rate (PCR) Model, which estimates a potential national cap rate based on these CRE market fundamentals, while interest rates influence cap rates, recent CRE property price growth is a more significant driver. For example, in the first quarter of 2022, record high price growth was able to counteract the impact of increasing interest rates and keep CAPs low.

What Does this Mean for Sellers?

According to Xander Snyder, First American senior commercial real estate economist, since CAP rates measure the return on an asset, higher rates mean sellers will need to reduce their price expectations or increase cash flow to entice buyers seeking competitive yields. This process could also push cap rates up. Fortunately, many markets have seen rent increases which could help offset this. Owners of investment properties looking to take advantage of lower CAP rates and therefore a higher return should consider selling before rates increase further.

Linville Team Partners is Here to Assist

Are you looking to see what decision is best for you and your investment property in the current market?

Linville Team Partners is here to help you navigate this process. Contact us to request a free Broker Opinion of Value on your property.