That’s rate news: An improving economy and capital flows help maintain cap rates, even as interest rates rise
During the last several months, the financial markets have been adjusting to the Federal Reserve’s decision to normalize monetary policy. As a result, investors are worried about the possible impact of higher interest rates on real estate pricing. If 10-year Treasuries increase to a range of 4.6 percent to 4.9 percent during the next five years, as forecasted by Moody’s Analytics, today’s private real estate pricing, which assumes unleveraged total returns in the 6.5 percent to 7.5 percent range, is sustainable.
What history tells us
Following a peak of close to 15 percent in September 1981, 10-year Treasury yields have generally trended downward subject to five periods of interest rate increases lasting a year or more, (see line graph on page 38). The globalization of capital markets and especially the increasing role of the U.S. dollar as a