Crew Enterprises Cap Rate And Interest Rate Correlation
By Crew Enterprises
Crew Enterprises Rates Introduction
Table of Contents
Crew Enterprises Key Points
- Crew Enterprises has identified that real estate cap rates and interest rates generally move together: when interest rates rise, cap rates tend to rise, and when interest rates fall, cap rates tend to fall.
- Historical data shows cap rates were higher in the 1980s (around 9.8% to 10%) when interest rates were high, and lower in recent years (around 4% in 2020) with lower interest rates.
- The correlation can vary, with cap rates sometimes lagging behind interest rate changes due to appraisal delays.
Understanding The Relationship
Crew Enterprises Breakdown
Cap rates, or capitalization rates, measure the return on a real estate investment by dividing the property’s net operating income (NOI) by its value. Interest rates, particularly the 10-year Treasury yield, represent the cost of borrowing and influence investor expectations for returns. Crew Enterprises has found that when interest rates are high, borrowing is more expensive, so investors demand higher returns from real estate, leading to higher cap rates. Conversely, low interest rates make borrowing cheaper, potentially lowering cap rates as property values rise.
Historical Data
Below is a table with estimated historical cap rates and 10-year Treasury yields for selected years, based on available data and reports.
10-Year Treasury Yield Historical Cap Rates
| Year | Cap Rate (%) | 10-Year Treasury Yield (%) |
| 1980 | 9.8% | 11.05% |
| 1985 | 9.0% | 10.70% |
| 1990 | 8.0% | 8.17% |
| 1995 | 7.0% | 6.70% |
| 2000 | 6.0% | 5.845% |
| 2005 | 5.5% | 4.30% |
| 2010 | 5.4% | 3.465% |
| 2015 | 5.0% | 2.2% |
| 2020 | 4.0% | 1.48% |
CREW ENTERPRISES SOURCES AND NOTES
- The 10-year Treasury yield data is sourced from the Federal Reserve Economic Data (FRED).
- Cap rate estimates are based on historical reports from NCREIF, CBRE, and other sources, and may not reflect exact values for each year due to limited public access to comprehensive datasets.
Comprehensive Analysis of Historical Cap Rates and Interest Rates
This analysis delves into the intricate relationship between real estate capitalization rates (cap rates) and interest rates, exploring historical trends, influencing factors, and recent market dynamics. Crew Enterprises findings are grounded in a synthesis of web-based research, industry reports, and empirical data, providing a thorough understanding for investors and professionals.
Crew Enterprises Definition and Theoretical Framework
Cap rates are calculated as the ratio of a property’s net operating income (NOI) to its current market value, serving as a key metric for assessing real estate investment returns. Interest rates, particularly long-term rates like the 10-year Treasury yield, represent the cost of borrowing and influence investor expectations for returns, notes Crew Enterprises.
Theoretically, rising interest rates increase borrowing costs, potentially reducing demand for real estate and increasing cap rates, as investors seek higher yields to offset higher financing costs. Conversely, falling interest rates lower borrowing costs, boosting demand and compressing cap rates, as seen in recent forecasts for 2024-2025.
Historical Correlation and Empirical Evidence
Historical data reveals a generally positive correlation between cap rates and interest rates, though not always linear. A 2016 whitepaper by TIAA Global Real Assets, cited in a CFA Institute post, found a correlation coefficient of 0.7 between cap rates (proxied by the NCREIF Property Index, NPI) and the 10-year Treasury yield from Q4 1992 to Q3 2015. This suggests that as interest rates rise, cap rates tend to follow, reflecting higher required returns.
However, Morgan Stanley’s analysis (1983-2013) showed 5-year rolling correlations fluctuating between -0.82 and 0.79, indicating periods where cap rates moved inversely, particularly during rising rate cycles.
CBRE’s econometric review since 1995 further quantifies this relationship, showing that for every 100-basis-point change in the 10-year Treasury yield, cap rates adjust variably by property type, as detailed in the table below:
Treasury Yield Cap Rates
| Property Type | Cap Rate Movement (bps per 100 bps Treasury Yield Change) |
| Industrial | 41 |
| Retail | 78 |
| Office | 70 |
| Multifamily | 75 |
This data, from CBRE, highlights industrial assets as least sensitive, likely due to sustained demand for logistics properties.
Lags And Appraisal Dynamics
Cap rates often lag behind interest rate changes due to the nature of real estate valuations, which rely on periodic appraisals rather than real-time transactions. Morgan Stanley’s adjusted analysis, incorporating a one-year lag, aligns with similar findings, suggesting that cap rates reflect market adjustments with a delay.
Historical Data Compilation
Given the challenge of accessing comprehensive historical cap rate data, estimates were derived from various sources. The ResearchGate paper indicated NCREIF cap rates averaged 7.7% over a 30-year period (likely 1980-2010), with a high of 9.8% and a low of 5.4%. Articles like The Real Deal mentioned late 1990s cap rates at 8.5%. CBRE reports provided recent estimates, such as H1 2022 cap rates around 4.7% for apartments. Based on these, a time series was constructed:
2022 Cap Rates for Apartments
| Year | Cap Rate (%) | 10-Year Treasury Yield (%) | Source Notes |
| 1980 | 9.8% | 11.05% | NCREIF High, FRED Average |
| 1985 | 9.0% | 10.70% | Estimated, FRED Average |
| 1990 | 8.0% | 8.17% | Estimated, FRED Average |
| 1995 | 7.0% | 6.70% | Estimated, FRED Average |
| 2000 | 6.0% | 5.845% | Estimated, FRED Average |
| 2005 | 5.5% | 4.30% | Estimated, FRED Average |
| 2010 | 5.4% | 3.465% | NCREIF Low, FRED Average |
| 2015 | 5.0% | 2.2% | Estimated, FRED Average |
| 2020 | 4.0% | 1.48% | Estimated, FRED Average |
The 10-year Treasury yield data was sourced from FRED, with annual averages calculated for each year.
Influencing Factors And Market Nuances
Several factors modulate the cap rate-interest rate relationship, including credit availability, supply-demand dynamics, real interest rates, and macroeconomic conditions. Linneman’s model, referenced in a CFA Institute post, indicates that a 100 bps faster or slower mortgage debt growth relative to GDP expands cap rates by 22 bps for multifamily and 65 bps for office properties, with unemployment increases also slightly expanding cap rates.
Property type significantly influences sensitivity, with retail and office showing higher responsiveness (78 bps and 70 bps, respectively) compared to industrial (41 bps), as per CBRE’s findings. Recent market trends, such as the impact of remote working on office demand, further complicate dynamics, with cap rates expanding by 190 bps across core sectors, driven by office (255 bps) and multifamily (195 bps) from 2022 peaks.
Current Market Trends And Projections
In 2023, according to Capital Economics, NCREIF data showed all-property values down 16.1% from Q2 2022 peaks, with cap rates reflecting increased risk amid rising interest rates. JPMorgan Chase notes that cap rates increased nationally in 2024, with multifamily, industrial, and office rising by 0.4% or more between Q2 2023 and Q3 2024, compared to higher increases in 2023, anticipating rate cuts in 2025 to lower borrowing costs and decrease cap rates.
CBRE projects cap rate compression by end-2025, with reductions from peaks including 40 bps for industrial and 35 bps for retail, stabilizing at higher levels than pre-COVID due to persistent economic factors like federal deficits. Expected 10-year Treasury yields averaging below 4% in 2024 and mid-3% in 2025 are anticipated to put downward pressure on cap rates, with long-term stabilized rates projected at 4.5% for industrial and multifamily, 5% for office, and 4.6% for retail.
Conclusion And Investment Implications
Crew Enterprises believes the positive correlation between cap rates and interest rates is well-supported by historical and recent data, though its strength varies by property type and market conditions. Investors should consider these dynamics, alongside lags in valuation and external factors like inflation, when making decisions, particularly in navigating cycles of rate cuts or rises. Diversified strategies and attention to sector-specific sensitivities, as highlighted by CBRE and CFA Institute analyses, are crucial for mitigating risk.
