Impact of Interest Rate Cuts on Real Estate Cap Rates

As the Fed cuts interest rates, cap rates in real estate are expected to shift, with long-term yields playing a crucial role in driving investment decisions.

Jordan B.
October 15, 2024

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Good morning. As the Fed cuts interest rates, cap rates in real estate are expected to shift, with long-term yields playing a crucial role in driving investment decisions. Plus, the owners of Manhattan’s Worldwide Plaza are in talks to modify a $940 million office loan.

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Impact of Interest Rate Cuts on Real Estate Cap Rates

With the Fed cutting interest rates, real estate cap rates are expected to respond, especially as long-term yields are most influential in real estate investment decisions.

Sensitivity: According to CBRE Econometric Advisors (CBRE EA), real estate cap rates have shown varying degrees of sensitivity to changes in the 10-year Treasury yield. For every 100-basis-point shift in the Treasury yield, cap rates historically adjust as follows:

Sensitivity of Cap Rates to Macro Factors

Industrial resilience: Industrial assets have shown less sensitivity to long-term interest rate changes due to rising demand for logistics space, especially after the COVID pandemic. Prior to 2010, industrial properties were less in demand, resulting in weaker cap rate compression. However, the post-pandemic boom in e-commerce and logistics has boosted NOI (net operating income), keeping cap rates relatively stable in the sector.

Cap rate outlook: CBRE expects the U.S. to avoid a recession as inflation continues to ease toward the Fed’s 2% target. With Treasury yields forecasted to stay below 4% through 2024 and drop to the mid-3% range in 2025, lower borrowing costs should put downward pressure on cap rates. Strong fundamentals in most real estate sectors (excluding office) will drive rent growth and further support cap rate compression.

Cap Rates & 10-Year Treasury Yields

➥ THE TAKEAWAY

Looking ahead: Cap rates will compress gradually but won’t return to pre-pandemic lows. Investors should pay attention to broader macroeconomic drivers like inflation and GDP growth and be selective about markets and asset types, especially given the ongoing challenges in the office sector.

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✍️ Editor’s Picks

Transit to housing: The Santa Clara Valley Transportation Authority plans to demolish its North San Jose headquarters to build up to 1,300 homes after relocating to a new downtown office in 2026.
Cost segregation strategy: Passive real estate investors can boost ROI and cash flow by accelerating depreciation on property components, reducing tax liability in early ownership years. (sponsored)
Broker probe: Cushman & Wakefield broker Diana Boutross had her phone seized as part of a Manhattan DA investigation into potential bribery related to city commercial leases.
Scrapyard auction: Carl Icahn is set to auction his 45-acre East Bank scrapyard near Nissan Stadium in November, as the site gains interest due to Nashville's ongoing redevelopment.
PGA sale: Brookfield Asset Management is nearing a $425 million sale of Palm Beach’s PGA National Resort to Henderson Park, reflecting strong demand for Florida golf properties.
‘stranded asset’: The push for net zero is creating a potential wave of "stranded assets" in real estate, where buildings may become too costly to upgrade for sustainable compliance, leaving them commercially unviable.

🏘️ MULTIFAMILY

Hot spot: Detroit became the most popular U.S. rental market in September, according to RentCafe, driven by revitalization efforts and increased downtown apartment demand.
Signs of life: KKR sold the 365-unit 80 Dekalb Avenue rental tower in Downtown Brooklyn to Atlas Capital for $202.5 million, marking one of the borough's biggest deals of the year.
Buyer revealed: Kushner Companies is purchasing the Hamilton apartment tower in Miami’s Edgewater for $190 million from Aimco.
Renter relief: Manhattan rents dropped 3.4% in September to a median of $4,200, but prices remain near record highs, keeping the market highly competitive.

🏭 Industrial

FL foreclosure: Woodforest National Bank is seeking $13 million in foreclosure against medical supply distributor David Frank after defaulting on a loan for a Hollywood, Florida warehouse.
Revival: Metro Atlanta’s industrial market is seeing signs of recovery with large-scale leases, including a 1.4M SF facility for Target, though experts caution it’s too early to declare a full rebound.

🏬 RETAIL

Holiday hiring: Retailers are ramping up holiday hiring for 2024, though overall job gains may be lower due to a softening economy.
Grocery clinics: In-store health clinics are boosting foot traffic and attracting affluent shoppers to grocery chains like Kroger, Jay C, and H-E-B, with some locations increasing visits by over 90%.
Target takeover: Target will replace the last full-sized Kmart at Bridgehampton Commons, taking over its 90,000-square-foot space and becoming a rare big-box retailer in the Hamptons.

🏢 OFFICE

Debt trouble: SL Green and RXR’s Worldwide Plaza in Manhattan has fallen into special servicing as the owners seek loan modifications for the $940 million mortgage amid vacancy issues and financial struggles.
O’Hare sale: Adventus Realty Trust’s three-tower office complex near Chicago’s O’Hare Airport is up for sale after defaulting on a $173M loan, with JLL managing the listing and offering assumable financing.
REIT refi: Singapore-based Prime US REIT secured $550 million in refinancing, led by Bank of America, for its $1.3 billion Class A office portfolio across 13 U.S. properties.

🏨 HOSPITALITY

Expansion: Marriott plans to develop two hotels in Miramar, totaling 160 rooms across 99,798 square feet, pending city approval.

📈 CHART OF THE DAY

The average delinquency rate for commercial mortgage-backed security (CMBS) hotel loans was 5.8% for the first nine months of 2024. The lowest rate occurred in January at 5.65%, while the highest was in May, reaching 6.47%.