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CRE Finance World, Summer 2013

Figure 6 10 Year Treasury Rate vs. Office Cap Rates Source: Reis, Inc., Federal Reserve During the period from mid 2006 until early 2009 when interest rates were falling, the gateway metros had an average correlation of -.56 and only one of the individual metros, San Diego, had a positive correlation. After the recession had ended, when interest rates were falling once again after rising briefly, average correlation for the gateway metros was -.20. Although not as strong as during the prior two periods of measurement, this is greater than what we observed on a national basis. CRE Finance World Summer 2013 38 Figure 7 10 Year Treasury Rate vs. Office Cap Rates Source: Reis, Inc., Federal Reserve For non-gateway metros, the relationship between interest rates and cap rates is somewhat different. The magnitude of the relationship is not as strong and during the most recent period of falling interest rates it actually breaks down. From mid 2003 to mid 2006 the non-gateway metros had a mean correlation of -.37. Although this is positive, it is significantly weaker than what we observed for the gateway metros. Moreover, even though there are far more non-gateway metros than gateway metros, a number of them actually had positive correlations during this period. From mid 2006 until early 2009 the non-gateway metros has an average correlation of -.10. This is a far weaker relationship than what we observed both nationally and for the gateway metros. Once again, a number of metros had positive correlations, some of them very strongly positive (i.e. greater than +.90). Post-recession, during the interval with falling interest rates, the relationship really begins to dissolve. The average correlation for non-gateway metros was .22, indicating that the relationship is actually positive — cap rates are falling while interest rates are falling. Interest Rates, Cap Rates and Commercial Real Estate Values “Through three different intervals in the 2000s with both rising and falling interest rates, we observe a generally negative relationship between interest rates and cap rates, somewhat counterintuitive to expectations.”


CRE Finance World, Summer 2013
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