Interest Rates, Cap Rates and Commercial Real Estate Values via CRE Finance World

Commercial real estate as an asset class was not alone in its decline during the downturn of 2008-2009, as investor sentiment turned overwhelmingly risk-averse and liquidity dried up. As the economy recovered, commercial real estate valuations rose as cap rates fell. By late 2010, cap rate levels had declined significantly. Several factors contributed to this recovery, not the least of which are the low interest rates supported by the Federal Reserve. The question now is how cap rates and commercial real estate valuations will fare, once interest rates begin to rise.

Selection Bias, Cap Rate Confusion and Valuation

Consider the charts below and the divorce between trends in fundamentals and cap rates. The chart on the left indexes vacancy rates for the multifamily, office and retail sectors from the beginning of 2006 until the end of 2012. There is clearly a discrepancy in inflection points and recovery rates, with multifamily leading the way in terms of occupancy improvements. Office and retail vacancies have begun to recover over the last five to six quarters, but at a much slower pace.

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