The Relationship Between Cap Rates and Real Estate Interest Rates
By Crew Enterprises
Table of Contents
Introduction
The correlation between real estate capitalization rates (cap rates) and interest rates has long been a critical topic for investors. Generally, cap rates tend to move in tandem with interest rates when interest rates rise, cap rates tend to rise, and when interest rates fall, cap rates decline. However, the relationship is influenced by various economic factors and can exhibit time lags. Understanding this dynamic is essential for real estate investors seeking to optimize their portfolios.
Defining Cap Rates and Interest Rates
A capitalization rate (cap rate) measures the return on a real estate investment and is calculated as:
Cap Rate = Net Operating Income (NOI) \ Property Value
On the other hand, interest rates, particularly the 10-year Treasury yield, represent the cost of borrowing and serve as a benchmark for investor expectations. The general trend suggests that higher interest rates increase financing costs, which leads investors to demand higher cap rates for risk-adjusted returns.
Historical Data on Cap Rate and Interest Rate Correlation
Historical trends support the positive correlation between cap rates and interest rates.
For example:
- In 1980, when the 10-year Treasury yield was 11.05%, the average cap rate was 9.8%.
- By 2020, with a 1.48% Treasury yield, cap rates had fallen to 4% (Crew Enterprises, 2025).
This trend is influenced by borrowing costs, investor expectations, and overall market conditions.
Key Factors Influencing the Relationship
- Economic Growth and Inflation: High inflation can push interest rates higher, impacting property values and cap rates.
- Credit Availability: When lending is restricted, investors demand higher cap rates.
- Real Estate Demand: Property types like industrial and multifamily exhibit different sensitivities to interest rate fluctuations (CBRE, 2024).
