H1 2025 Share of Respondents by Expectation for Cap Rate Movement Over the Next Six Months
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H1 2025 Share of Respondents by Expectation for Cap Rate Movement Over the Next Six Months
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Conventional wisdom has long said: where interest rates go, cap rates soon follow.
In other words, when the cost of capital is high, so too is the ratio of a property’s net operating income to its current market value — the real estate capitalization rate — and investors’ rate of return suffers.
So it shouldn’t come as a shock that after the Federal Reserve lowered interest rates by 25 basis points last week, CBRE adjusted its forecast for U.S. commercial real estate investment volume growth for the year from 10 percent to 15 percent. Similarly, the commercial brokerage announced investors can expect to see continued refinancing opportunities and “limited compression” in cap rates.
But historically, cap rates have not always been so sympatico with Federal Reserve fluctuations.
An analysis of cap rates for the NCREIF Property Index (NPI) from 1987 to 2013 by Nuveen reveals five periods of time marked by both cap rate compression and increasing federal funds rates, most notably during the 40-month period ending in June 2006 when cap rates for the NPI fell by 205 basis points while the U.S. 10-year Treasury yield grew by 130 basis points.
The reverse is also possible, though most investors believe that won’t be the case this year, according to CBRE. Indeed, the brokerage’s most recent Cap Rate Survey, released in August, provides a glimpse into a few of the factors that could weigh heavily on commercial real estate returns in 2025, even if the industry gets the additional cuts to the federal funds rate it’s hoping for before the end of the year.
The greatest source of trepidation is the impact of tariffs, according to the report, which comprises 3,600 cap rate estimates from across 50 U.S. markets and a survey of 200 commercial real estate professionals selected by CBRE.
More than half of respondents said they anticipated lower sales volume this year in the commercial real estate sector due to tariffs.
The stock market crash that occurred when tariffs were announced on April 2 — and subsequent recovery after they were paused — caused extreme volatility in treasury yields, and plenty of alarm bells from analysts.
Even so, the sector proved resilient, with cap rates declining slightly to 5.95 percent at the end of the second quarter of 2025 from 6 percent a year ago, according to CBRE.
That may be a sign that cap rates have peaked and a new period of property yield compression is underway, the report concluded, siding with the wisdom of the crowd: The majority of respondents said they expected cap rates to stabilize or decline over the next six months.
The percent who chose the third option — that they expected cap rates to increase over the next six months – was not provided in the report.
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