What Really Drives Returns

When investors hear about possible Fed rate cuts, the first question that comes up is: Will cap rates follow?

The instinct is to assume cap rates track interest rates, but the reality is far more nuanced. At The Christensen Group, we encourage clients to think beyond the cap rate — because the data shows there’s much more at play.

The Myth of a Direct Connection

Yes, interest rates matter. But the historical data shows only about a 40% correlation between Treasury yields and cap rates. At times, they move in lockstep. Other times, they move in opposite directions.

The Real Driver: Transaction Velocity

If not interest rates, then what? The stronger force is transaction velocity.

Across apartments, office, retail, and industrial, the data shows a consistent 78% inverse relationship: when deal activity accelerates, cap rates compress. When activity slows, cap rates expand.

This pattern has repeated through cycles — from 2002–2006, 2007–2010, and again in 2021–2024.

Why the Next Cycle Could Be Different

Looking forward, several forces are converging:

• Pent-up capital waiting to be deployed

• Elevated mortgage maturities coming due

• 100% bonus depreciation on qualifying acquisitions

• Early signs of rising transaction volume

Taken together, these suggest transaction activity will climb in the latter part of 2025 and into 2026, regardless of whether interest rates fall.

What Investors Should Do Now

The bottom line: cap rates aren’t primarily about the Fed — they’re about capital flows. That’s why we encourage investors to think beyond the cap rate.

Smart investors are already:

• Pruning weaker assets from portfolios

• Preparing capital for redeployment

• Targeting markets positioned for stronger returns

The investors who act before the wave could benefit most.

Curious how these trends could impact your strategy? Contact The Christensen Group to explore opportunities and position your portfolio ahead of the curve.