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TROUBLE ON THE HOR I ZON The Comi ng D i l emma Ove r R i s i ng I n te res t and Cap Ra tes
Reflecting on economic and real estate conditions from 2018 and developments in the industry in 2019, two major factors stand out.
1. Cap rates have been low for a long time, vacillating between 4.5–5.5 percent in many markets. The effective federal funds rate stands at 2.4 percent, and the 10-year treasury stands at just over 2.6 percent. In a recent interview, Jamie Dimon, the CEO of JPMorgan Chase, commented that he would not be surprised to see the 10-year rate at 5 percent. 2. The Federal Reserve made three rate increases in 2018, bringing the federal funds rate to 2.5 percent. Many expect two to three additional increases in 2019, bringing the rate to 3.0–3.25 percent. Faced with these circumstances, the real estate industry needs to ask one simple question: Are cap rates correlated to interest rates, or will the rising interest rates cause cap rates to increase as well and cause a decline in real estate values?
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