Higher Interest rates do not always equal higher CAP rates

According to an article published on www.costar.com, higher interest rates should not automatically signal to investors to look for higher cap rates and lower property values. With The Fed bumping rates up .25% earlier this month, there has been theorizing that increased interest rates mean cap rates will soon follow. In many cycles, that is indeed the case – though it’s a delayed response by the market, and not instantaneous.

The Costar article goes on to explain that if an interest rate increase is due to strong economic growth (as we are in currently), demand for real estate will likely remain high and keep cap rates flat and values high. It is anticipated that while interest rates will continue to go up in 2017, real estate activity is likely to remain strong and cap rates will flatten before they rise. Many properties on the market have built in rent increases in their leases, and subsequently NOIs, so the low cap rates can be stomached by investors even in a rising interest rate economy.

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