How long does it take for cap rates to rise after interest rates?

[Eric Berkner]

Just curious how long it takes for CAP rates to rise as we recently saw a huge increase in interest rates. I am hoping to get into small multifamily and am hopeful the rising cap rates may help find deals.

[Peter Nikic]

it's still tricky. cap rates rise, so do interest rates. 

since interest rates already rose, just waiting for cap rates to go up in order to make deals work. 

[Brian Burke]

Answering with a time implies that cap rates actually do rise when interest rates rise—not necessarily so.  I’ve seen my share of times where cap rates fell as interest rates rose.

Interest rates aren’t the only outside factor impacting the value of an income stream (and thus the properties producing such income stream).  The ability to grow that income stream (value-add), or the likelihood it will grow organically (rent growth) also affect the value.

As we've recently watched rates rise, we've also seen massive rent growth. That has pushed NOI forecasts higher and have kept cap rates low, despite higher borrowing costs.

But inflation is competing for tenant’s surplus dollars, leaving less money to support continued rent increases.  My gut tells me that rent growth has already begun to slow, but the published data hasn’t caught up yet.  There’s always a lag.

My prediction is cap rates will rise as more people realize rents aren’t growing like they were. The data will likely show that over the next few months.

But this won’t help you make deals work.  Low (or no, or negative) rent growth, high interest rates, and declining occupancies don’t help make deals work either, until they send sellers to a breaking point. The jury is still out on whether we’ll see that happen, or not.