The big takeaway from last week's meeting of the Federal Reserve appears to be that interest rates will rise next year – and that has many CRE professionals asking if cap rates will also go up.
But Jim Costello of Real Capital Analytics is asking a different question: why should cap rates start responding to interest rates now all of a sudden?
While Costello acknowledges "there are a number of ways to unpack cap rates, what drives them, and how investors should set expectations around them," he takes issue with what he calls the most pervasive and simplest approach: to examine 10-year Treasuries, to add the current spread to cap rates to those future predictions, and to then assume that cap rates move up in lockstep.
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