Research report

The end of an era

How the relationship between interest rates and cap rates affects the outlook for CRE equity investments

Download the complete report
June 7, 2019 | 10 minute read

Interest rates have fallen to historically low levels over the past two decades thanks to a number of structural and cyclical factors. Investors in commercial real estate (CRE) equity reaped the benefits of this trend as cap rates declined in concert and boosted property price appreciation.

Although real estate fundamentals remain strong, cap rate compression – and its contribution to price growth – is moderating. For equity investors, this signals the end of an era as further declines in cap rates are set to contribute less to total returns in the future.

What does this mean for CRE investors?

The FS Investments Research team explains the relationship between cap rates and interest rates, its connection to past CRE performance and how these factors and current economic conditions may impact future sources of CRE returns.


Investment research | Interest rates, cap rates and the outlook for CRE investing

This report:

  • Offers a refresher on how cap rates relate to real interest rates and contribute to price appreciation
  • Reviews historical drivers of price growth and identifies a recent shift in cap rate and NOI proportions
  • Provides insight on potential future sources of return in the face of moderating cap rate compression

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site