Marketing SUmmary 9.8.25

If The Fed Cuts Interest Rates, Will Cap Rates Follow?

The historical relationship between interest rates and cap rates is relatively weak. Over the past two decades, apartment cap rates and the 10-year Treasury yield have shown only about a 40% correlation. This means that while both have trended downward over the long term, short- and medium-term movements often diverge. For example, in the 1990s cap rates fell even as Treasury yields rose, while in the 2000s the opposite occurred.

Instead, transaction velocity has proven to be the far stronger driver of cap rate shifts. Since 2001, transaction volume and cap rates have maintained an inverse correlation of about 78%. When deal activity accelerates, cap rates compress, and when transaction flow slows, cap rates expand. This suggests that the path of cap rates ahead will depend less on Fed policy in isolation and more on whether rate adjustments spur renewed market activity.

Looking ahead, a potential rate cut could indirectly push cap rates lower by unlocking pent-up demand in the investment market. Higher interest rates in 2023 and 2024 slowed deal flow considerably, but with more than $200 billion in closed-end funds ready to deploy and nearly $1 trillion of commercial real estate debt maturing in 2025, the conditions are in place for transaction volumes to rise. If borrowing costs ease, that capital could reenter the market quickly, setting the stage for cap rate compression.

For investors, the timing creates a window of opportunity. Even if the Fed cuts rates, cap rates are unlikely to adjust immediately, leaving a short-term gap where financing conditions improve but valuations have not yet fully recalibrated. Those who act during this transitional period may be able to secure quality assets at favorable pricing before increased activity drives competition and cap rates lower. Over the long term, investors should remain focused on fundamentals, targeting properties in strong demand corridors and resilient sectors where transaction-driven momentum can deliver lasting value.