The macroeconomic environment has been marked by unusual trends, with short- and long-term interest rates diverging in behavior, as CBRE recently observed. Despite these complexities, there are reasons for optimism in the commercial real estate market, particularly regarding cap rate compression.
CBRE anticipates some degree of cap rate compression this year, which could serve as a key incentive for investors. Under current conditions, this scenario is more likely to occur in the year's second half. However, if bonds rally and the broader macroeconomic environment remains favorable, investment activity could accelerate earlier in the year. While there is potential for cap rates to compress more than expected, this is likely to be limited because interest rates are unlikely to return to their pre-pandemic lows.
This outlook for cap rate compression ties closely to broader trends in the bond market and investor sentiment. Over the past few months, the Federal Reserve has taken significant steps to ease monetary conditions, cutting the federal funds rate by 50 basis points in September 2024 and following up with two additional 25-point cuts in November and December. However, these moves have not led to the bond rally that might typically be expected. Instead, yields on the 10-year Treasury note rose more than 100 basis points, reaching 4.79% by January 13, 2025. Although they declined to 4.23% by March 31, 2025, yields remain over 60 basis points higher than their levels from last September.
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