RCA Insights

Chart: Decomposition of US Cap Rates

By on April 30th, 2018

The 10yr US Treasury broke the 3% barrier last week. Does that necessarily mean that cap rates will surge?

As shown in the chart, there is no constant spread between cap rates and the 10yr UST. Lenders, in fact, have been absorbing some of the increases so far.

The spread between the 10yr UST and the average 7/10yr mortgage rate has compressed in recent months though still provides a margin for lenders. With lenders absorbing the 10yr UST increases to date, equity investors still have positive leverage in their investments with a historically wide spread between cap rates and the average 7/10 yr mortgage rate.

If, as many expect, the 10yr UST moves higher than 3%, these spreads need not remain constant. As they narrow, cap rates would go up less than any increases in the 10yr UST.

1804 Cap rate decomp


Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.