How Will Higher Interest Rates Impact Cap Rates?

The 10 year US treasury jumped over 3% last week. It is currently at 2.972%. A number of clients have asked, does that mean cap rates will follow? The answer isn’t simple, but in short the answer is not yet. The chart below shows the equity and debt spread on cap rates against the 10 year treasury. Lenders have absorbed most of the increases thus far and equity spreads have stayed relatively unchanged.

However, if treasuries continue to increase, don’t expect your lender to pick up all the slack. The Fed is widely expected to hike the Fed Funds Rate by 25 bps in June and September and an increasing number of policymakers are now expecting a third hike by the end of the year. Lender spreads are currently around 200 bps and another 75 bps hike will certainly lead to shrinking spreads on the equity side and eventually higher cap rates.