How will Cap Rates Behave when Interest Rates Jump? via Commercial Property Executive

This question, of course, is loaded heavily by the increasingly debatable assumption that interest rates indeed will rise in the near future. Yet for the sake of discussion, let us accept the premise that the Fed will soon engineer a modest uptick in, among other rates, the 10-year treasury. Let us further presume that this increase will come as a result of improved employment and a return to healthy inflation growth.

Dime-store wisdom tells us that cap rates will move closely with interest rates, reflecting a simple premium for real estate over treasuries. Reality, however, has proven far more complex. To make sense of this dysfunctional relationship, economists have expressed cap rates in various algebraic terms that can be summarized as follows:

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