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M id A tlantic Real Estate Journal Marcus & Millichap Research Brief: If Interest Rates Ease, Will Cap Rates Follow? I f interest rates fall, will a drop in cap rates not be far behind? Many investors believe that capitalization rates on com- mercial real estate transac- tions are linked to interest rates. If the Federal Reserve lowers the overnight lending rate, and other interest rates such as the 10-year Treasury yield also decrease, these in- vestors expect cap rates will contract to some degree. While it is broadly true that both the 10-year yield and the average cap rate have trended lower over the past three decades, empirical analysis shows this relationship is limited. • Between October 2001 and June 2025, movements in the 10-Year Treasury yield were only 40 percent correlated with movements in the aver- age apartment cap rate. • There are multiple in - stances when changes in the Treasury yield did not line up with shifts in cap rates. • In 1994 and 1996, Trea - sury rates spiked, but cap rates trended lower. Later, from 2002 through 2006, the 10-year yield was rising slow- ly, while cap rates steadily fell. • Then, from 2006 until 2008, Treasury yields dropped
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fast as cap rates went up. Alternative influence on cap rates more apparent. There is a different metric that is more correlated with cap rates but from an inverse perspective — transaction velocity. The correlation between changes in the number of trades and movements in cap rates since 2001 was 78 percent. • There was a clear trend from 2002 through 2006 where transaction flow was climbing and cap rates went down. • Then, in 2007 and extending until the end of 2010, the count of trades fell and cap rates rose. • This inverse relationship is also demonstrated in the spike of sales activity that took place in 2021 and 2022, which coincided with a decline in cap rates.
• After that cycle, when trading fell in 2023 and 2024, cap rates went up. Are interest rates instead linked to sales? Overall, there is only a 30 percent correlation between interest rate move- ments and transaction veloc- ity, even after accounting for the time it takes to conclude a trade. The most recent mon- etary policy tightening cycle is a clear exception, however. Given higher interest rates in 2023 and 2024 directly constrained sales, if interest rates were to drop in the near future, it could encourage more transactions, especially given supporting factors: • Capital has accumulated on the sidelines, sitting at over $200 billion just among continued on page 6
Client: KEEN-SUMMIT • Job No: GAK-284 Publication: Mid Atlantic RE Journal
Issue Date: 9/19/25 Size: 4” x 4.25” B/W
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