Recently, the positive change in commercial cap rates could be attributed to the recovery of credit markets. Low cap rates and weak fundamentals have lead many to question the Fed’s low interest rates. These low rates may be excessively raising commercial prices. In a quote from FRBSF, “It’s true that cap rates are at historic low levels. But it’s important to compare cap rates with other financial market yields rather than with cap rates during other periods. Many market interest rates are at or near historic lows, so low cap rates are not anomalies.”
Overall, Low cap rates have reflected low commercial real estate yields. However, there are indications that improvements in CRE are part of a larger recover process taking place throughout the economy.
Article is a brief summary of FRBSF Economic Letter which can be read here.