“The Greenwich Group continue to play an important role in the growth of Calvano Development.  We have transitioned from a small developer funding projects at a local level to working hundred million dollar projects with global institutional capital.  The Greenwich Group have demonstrated an ability to work across the capital markets (both equity and debt) by adding value to projects through their underwriting, advocacy, and capital relationships.  They have been a committed partner to the expansion of Calvano Development as demonstrated by the successful capitalization of our multiple projects and Ventures.”

Mark A. Calvano
Calvano | Development

Interest Rate and Cap Rate Increases – Does This Always Lead to Decrease in Value and Returns?

by Abbas Junejo | 06.07.2018

A common misconception is the idea that real estate tends to post negative returns during periods of interest rate hikes. This is based off three primary rationale:

  1. The cost of debt increases as interest rates increase.
  2. The cost of equity increases as interest rates increase.
  3. Cap rates increase as interest rates increase.

These points would make it seem that rising interest rates would have a doubly negative impact on real estate from the earnings as well as the capital appreciation perspective – NOT NECESSARILY THE CASE !!!

Cap rates have exhibited a 0.7 correlation with interest rates when measured using the NCREIF Property Index (NPI), an index of operating properties owned by “tax-exempt institutions and held in a fiduciary environment.”1 . This indicates a 1% increase in cap rates for every 0.7% percent increase in interest rates.2 This may bode ill for investors as an increase in cap rates correlates to a decrease in asset prices all else being equal.

This may bode ill for investors as an increase in cap rates correlates to a decrease in asset prices all else being equal.

Taking into conjunction NPI returns from 1977-2017, the following results are observed by the Black Creek Group3: :

  NPI Total Return NPI Income Return NPI Price Return
40-YEAR AVERAGE 9.05% 7.09% 1.95%

It appears that total returns, price returns and income returns for the NPI were on average higher in rising interest rate periods than in those periods where interest rates were falling or the 40-year average return. This is primarily driven by higher economic growth during periods where interest rates are increasing, improving demand for real estate and increasing rents.

Using data on 1 Month T-Bill rates from 1978 -2017, we see similar results:4

  NTBI Total Return NTBI Income Return NTBI Price Return NPI Total Return NPI Income Return NPI Income Return
AVERAGE RETURNS 8.31% 2.72% 5.59% 8.01% 4.74% 3.27%
RISING INTEREST RATES AVERAGE 10.29% 3.65% 6.64% 8.83% 5.93% 2.89%

To insulate our results from errors in the NPI, we also utilize the NCREIF Transaction Based Index (NTBI), which measures returns using appraisals like the NPI as well as transactions. The NTBI shows greater returns in both capital appreciation and net income in periods of rising interest rates.

The correlations are as follows:5  



RFR 1.00 (0.75) (0.84) (0.68) (0.76) (0.83) (0.34)
NTBI TR (0.75) 1.00 0.96 0.99 1.00 0.97 0.63
NTBI NI (0.84) 0.96 1.00 0.92 0.95 1.00 0.42
NTBI CA (0.68) 0.99 0.92 1.00 0.98 0.93 0.71
NPI TR (0.76) 1.00 0.95 0.98 1.00 0.98 0.69
NPI NI (0.83) 0.97 1.00 0.93 0.98 1.00 0.56
NPI CA (0.34) 0.63 0.42 0.71 0.69 0.56 1.00

One can see the negative correlations of all components of the NPI and NTBI returns to the Risk-Free Rate. This indicates the inverse relationship of cap rates and real estate returns. We can hypothesize that while cap rates may rise during periods of rising rates, real estate incomes rise at a higher rate. One final data point corroborating our thesis is that the average quarterly change in the risk-free rate over this period has been 5.21% and in quarterly periods where the change has been above this average, real estate returns still outpaced aggregate returns for the period driven by greater income returns.

  NTBI Total Return NTBI Income Return NTBI Price Return NPI Total Return NPI Income Return NPI Income Return
AVERAGE RETURNS 9.09% 3.55% 5.54% 8.70% 5.74% 2.96%

This gives us confidence that periods of rising rates bode well for real estate investments despite rising cap rates.


[1]NCREIF Property Index, National Council of Real Estate Investment Fiduciaries, https://www.ncreif.org/data-products/property/

[2] Peyton, Martha & Pierzak, Edward, Real Estate: The Impact of Rising Interest Rates, TIAA-CREF, https://www.tiaa.org/public/pdf/real_estate_the_impact_of_rising_interest_rates.pdf, March 7, 2018

[3] Mueller, Glenn R., Do Rising Interest Rates Affect Commercial Real Estate Returns?, August, 2017, https://blackcreekgroup.com/wp-content/uploads/2017/06/WhitePaper-BCG-Raising-Interest-Rates_08-2017_FINAL.pdf, March 7, 2018

[4] NCREIF. NPI & NTBI Quarterly Returns. Raw data

[5]* RFR = Risk Free Rate, TR = Total Return, NI = Net Income, CA = Capital Appreciation


Peter Witham
Managing Partner
  Peter Witham is Managing Partner and Head of Capital Markets and Investment Banking in Washington, DC and California. His extensive experience extends over 25 years of commercial real estate experience in equity and debt financing, Investment sales, joint-venture structuring, asset management and consulting. He has extensive international experience in both the United States and United Kingdom.