Think cap rates are crazy low? They could drop even more as investors battle to own CRE income streams, according to a new analysis from First American Financial Corporation. But the firm says cap rates may be reaching a cyclical bottom.

For most of the last 20 years, the average cap rate across office, industrial, retail, multifamily, hotel, and senior housing has been dropping and is now at a period low "due to today's low interest rate environment and the limited supply of commercial real estate properties relative to strong post-pandemic demand," Xander Snyder, senior commercial economist at First American, said in prepared remarks.

The firm has a model it calls the potential capitalization rate that "estimates capitalization rates based on the historical relationship between interest rates, rental income, prevailing occupancy rates, the amount of commercial mortgage debt in the economy, and recent property price trends." It's a theoretical bottom to cap rates. If the actual cap rate is higher, then, according to the model, there is room for rates to fall even more.