Are Cap rates getting better?

Question

Maybe a very basic question, but I have been reading for a while that it's a good time to get into Commercial real estate because you are getting better cap rates now. Talking of multifamily specifically, how is it that we are getting better cap rates if the prices have not really reset lower. As far as I know the prices have continued to be stable or go up. Have the rents gone up that much?

Andrew Freed · Answer

@Chirdeep Bhutani - In my area, Worcester Massachusetts, with interest rates coming down, cap rates have gotten better and values have increased. Interest rates and cap rates are definitely correlated. If interest rates come down, cap rates tend to compact increasing values on properties. Think about it, if you are buying something at a 5% cap rate, but interest rates are 6%, the debt payment exceeds the income. However, if you purchase at a 5% cap rate and interest rates are at 5%, the property can support the debt payment. Hence you can see how interest rates play a large role in determining cap rates in a market in my opinion.

Jake Andronico · Answer

@Chirdeep Bhutani

It's market specific, but residential RE and commercial are not always directly correlated.

In multifamily here in Reno, NV (just over the hill), we have seen some great deals with higher cap rates for buyers, but also very low cap rates on some renovated, turn key inventory.

Dominic Mazzarella · Answer

Rising cap rates are mostly tied to higher interest rates—when borrowing gets more expensive, investors expect better returns, which pushes cap rates up. But prices don’t always drop right away; they often stabilize as buyers and sellers adjust.

For multifamily, rising rents in many markets have helped keep prices steady because higher rents mean better cash flow. That said, not all markets are the same—some are seeing rents slow, which could impact prices more.

Bradley Buxton · Answer

@Chirdeep Bhutani

Cap rates are a good starting point but are only a single measurement of an investment. They are good for comparison of different assets and limited in telling you when, where, or how to invest. It's like only using weight to measure fitness. An NFL player at 250 lbs is going to be a different fitness level than couch potato that weighs 250 lbs. As to others points rents will change with supply conditions. ATX is having a huge decrease in rents while Reno, NV is steady and even growing in certain areas. Sacramento seems to have a lot of inventory and buildable land which will increase supply keeping rent growth slow.

Chirdeep Bhutani · Answer

Thanks Guys for the response. Appreciate it.

Caleb Brown · Answer

In my area cap rates are getting better because there is less competition, lower prices and rents are still the same/rising.

Gino Barbaro · Answer

@Chirdeep Bhutani

From various sources, values peaked in 2022, and have gone down about 20%. If you talk to appraisers, we have another 20-30% to go. That's why there's been little activity. if you don't have to sell, you hold on.

This extend and pretend will end sooner or later, and when it does, investors will be forced to sell. And where you'll see cap rates go up is in the older assets and smaller markets.

Are Cap rates getting better?

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