CAP Rates lagging behind Interest Rates in Investment Properties

The Capitalization Rates (CAP Rate) in investment commercial real estate has been lagging behind interest rates since the Fed began adjusting upward in January of 2022 to combat inflation.  What this means is that there are other options for investors to park their money into that may have a higher immediate direct return on investment.

As a result of this lag, commercial real estate sales have gone down in 2023 to about half the level that they were in the booming years of 2021 and 2022 based on most national estimates.

As an investor, it is important to look at debt costs if not paying fully in cash for an investment property as a typical CAP Rate may be in the 5%-6% range for a credit tenant NNN leased property while interest rates are getting into the 7% range.  However, even with the discrepancy in rates that may occur on leveraged money, the properties also typically have rent increases (which are now trending up to 4-5% annually) and properties also generally tend to increase in value over time.  It can be a complicated valuation equation to determine the true net value of owning an investment property over time and having an experienced commercial real estate agent is vital to understanding the true return of an investment property.

 For a detailed valuation report on a possible commercial investment property, contact Stark Accelerators at 775-825-4400 in Reno or 208-722-2400 in Boise.