“Although these are shorter-term trends, we may be entering the transition to the next commercial real estate investment cycle, and getting active now could pay dividends,” said Chang.
July CPI inflation figures were in line with economists’ expectations, with headline inflation remaining at 2.7% while core CPI inflation rose by 20 basis points to 3.1%. Both numbers are higher than the Federal Reserve’s targets and are trending up, although they are still not showing a material impact from tariffs yet, said Chang. However, economists expect U.S. consumers to absorb a larger amount of tariffs as they come through, and many companies have warned they will pass on tariff costs to consumers.
One more inflation report will come out before the Fed’s meeting on Sept. 17, but there would have to be a substantial inflation movement in the Sept. 11 CPI report for the Federal Reserve to hold rates at their current level, particularly in light of recent signs of weakening employment, said Chang.
He cautioned that interest rate cuts don’t always translate into declines in the 10-year Treasury rate, a situation the economy experienced last year when the Fed rate cut spurred a surge in the Treasury rate.
“But for commercial real estate, any signs of downward pressure on interest rates is a positive,” said Chang.
National average cap rates remain elevated across all property types compared to the market peak in 2022, but the spread between the cap rates and the treasury rates is still pretty narrow based on the RCA Hedonic cap rate metrics, which try to account for variances in the composition of the deal flow, said Chang. Office cap rates are up by 20 basis points in the second quarter from a year earlier, reaching 7.7%. Industrial cap rates are also up by 20 basis points to 6.4%. Retail cap rates held steady from a year earlier at 6.9% nationally, and apartment cap rates were also stable, coming in at 5.7%.
“We’re seeing a little downward pressure on apartment cap rates in a handful of markets, but the momentum is still relatively isolated and marginal,” said Chang. “if interest rates and the cost of debt capital comes down over the next few months, it could unlock additional investment capital and potentially begin to put downward pressure on cap rates.”
