What’s happening to cap rate and pricing trends with the rise in interest rates and inflation? Staying ahead of the curveballs the economy keeps throwing is taking all the strength of the game, for professionals and enthusiasts alike. With inflation hitting hard, the Fed keeps hitting back just as hard with rate hikes in response.
The 3 Forces Pushing and Pulling Cap Rates
The push and pull on cap rates right now comes down to three factors:
- Rising inflation
- Rising rents
- Rising interest rates
Many investors we talk with expect pricing to fall and cap rates to rise as interest rates climb. Historically, that’s how it works. But given the 40-year high in inflation we’re currently experiencing, coupled with rising rents, expectation and reality haven’t come into alignment yet.
Why Cap Rates Are Falling, Not Rising
Demand is still high as the urgency to place cash continues, in order to protect it from ravaging inflation. With the volatility in the stock market, this is an ideal time to place capital in real estate as a stable, inflation-protected investment.
Deal Volume Is Falling
There’s been a lot of trading activity over the last two years, so the cheap lending money that made deals flow easily isn’t as available anymore. That means more cash has to be used, which brings down the overall cash-on-cash return. This softens demand, since more capital has to be deployed to make the same transaction happen. Pricing across the US is still on the rise, even while sales volume is falling.
These trends tie closely to how rents are keeping pace with inflation across the market. Looking for a competitive advantage in your portfolio? Contact us for a complimentary review, and let us make suggestions that will grow your NOI and asset value.
