CAP rates in rising interest rate environment

[Tyler Todhunter]

Hi all,

I am a small investor, currently with (2) 4-plexes and a SFR. I am lining my finances up to be able to purchase something larger, but with yesterdays Fed rate hike, I have a concern with commercial multifamily investing. As rates rise, investors want a higher rate of return- typically. By layman's logic, this would cause CAP rates to rise. With commercial properties priced according to CAP rates, is one setting themselves up for a losing proposition? A property purchased with a $100k NOI at a 5% CAP puts the price at $2,000,000 acquisition. If investors, in a year, demand a 6% CAP, value of the property would reduce to $1.66m for a loss of $333k. Of course, rents theoretically would increase with inflation to, perhaps, $110,000- this would still result in a loss of $167k.

CBRE is showing CAP rates trending down, at least through Q4 2021- which seems counterintuitive. Are there more market forces at play which may keep CAP rates at or around where they are currently? Or is it wise to wait for increased CAP rates to put money to better use?

I'm interested to hear your thoughts in these "unprecedented" times. “History doesn't repeat itself, but it does rhyme.” - Mark Twain