Do Rising Interest Rates Mean Higher Cap Rates for Real Estate?

August 04, 2016

One of the best performing and consistently stable asset classes over the past several years has been real estate. Based on the NCREIF-ODCE Index, real estate has returned an annualized 12.7% over the last five years. Much of the sector’s success has been attributed to strong fundamentals which have translated into cap rate¹ compression. Although cap rates are at historical lows and unlikely to compress much further, the unusually low interest rate environment combined with the spread between cap rates and risk-free Treasuries continue to make real estate investments look relatively attractive. Going forward, in anticipation of the Fed raising interest rates, we expect the current relatively wide cap rate to Treasury spread will provide a measure of cushion to allow long-term interest rates to rise without drastically impacting cap rates and the overall value of real estate.