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.
- 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