November 3, 2026
The Federal Reserve raised its target range for the federal funds rate by a quarter point on September 16, 2026, to 3.75% to 4%. Commercial Observer reports it was the first increase since July 2023 and that the vote was unanimous. On October 28, the committee held the range by a 10 to 2 vote. The two dissenters, Lisa Cook and Beth Hammack, preferred another quarter-point increase. This post looks at how interest rates relate to cap rates and what that means for commercial property valuation.
What the Fed signaled
Commercial Observer reports that the Fed’s September projections put the median federal funds rate at 4.1% at the end of 2026 and through 2027, and that 16 of 18 participants would support an additional hike this year. The October hold followed that, with two members voting for a hike. That points to a higher-for-longer environment, though the Fed’s path is not certain.
Long-term rates are described two ways
Commercial Observer reports that the 10-year Treasury yield crossed 5% on September 14 and on September 15 reached its highest level since 2007. Marcus & Millichap takes a different view, saying current yields remain broadly consistent with long-term averages and citing a roughly 70-year average of about 5.6%. Both can be accurate, because the answer depends on the time period used for comparison. Marcus & Millichap also reports about $865 billion of commercial real estate debt maturing in 2026 and $645 billion in 2027, and says refinancing pressure could push cap rates up.
Cap rates do not always follow interest rates
A cap rate is a property’s net operating income divided by its price. Rising rates would seem to push cap rates up and values down, but research shows a looser link. A 2016 TIAA Global Real Assets white paper, as summarized by the CFA Institute, found a correlation of 0.7 between cap rates and the 10-year Treasury yield from the fourth quarter of 1992 to the third quarter of 2015. The same paper concluded that cap rates do not always move in lockstep with interest rates. A column by Daniel Calano summarizes research from Reis, Morgan Stanley, and TIAA finding that cap rates fell in five of eight periods of rising rates since 1990. These studies are older, and neither predicts what will happen now.
Market participants disagree
Joseph Fingerman of Peapack Private Bank & Trust says higher rates have slowed deals, reduced loan proceeds, and widened the gap between buyers and sellers. Jay Neveloff of HSF Kramer says a quarter-point move does not change much. Ryan Koehler of NewPoint Real Estate Capital says lenders are less willing to extend maturities than in recent years.
What this means for valuation
The following points reflect general appraisal practice, not findings from the sources.
- Cap rate conclusions need current evidence. Sales that closed or were underwritten before the September increase and the rise in Treasury yields may not reflect today’s pricing.
- Thin transaction volume limits the evidence. When buyers and sellers disagree on price, appraisers may need to weigh contracts, listings, and lender or investor surveys, and state the limits of that data.
- Cap rates reflect more than the Treasury yield. Income growth, tenant quality, and risk all affect the rate, so a property-specific analysis matters more than a rule of thumb.
- Debt terms matter. Loan proceeds, borrowing costs, and refinancing risk can affect what a buyer will pay.
Teel Valuation Group prepares appraisals and appraisal reviews for lenders, attorneys, fiduciaries, and property owners. Connect with an expert at 713-467-5858.
Sources:
- Commercial Observer, “As Fed Hikes Rates for First Time Since 2023, Commercial Real Estate Comes to Terms”: https://commercialobserver.com/2026/09/fed-interest-rate-hike-kevin-warsh/
- Marcus & Millichap, “Federal Reserve Rate Hike Shifts the CRE Landscape,” September 2026: https://www.marcusmillichap.com/research/research-brief/2026/09/research-brief-september-interest-rate-implications
- InvestingLive, “The full statement from the October 2026 FOMC rate decision”: https://investinglive.com/central-banks/the-full-statement-from-the-october-2026-fomc-rate-decision/
- Admiral Markets, “FOMC October 2026: Fed Holds Rates in a 10-2 Vote”: https://admiralmarkets.com/analytics/traders-blog/fomc-october-2026-fed-holds-rates
- CFA Institute blog, “The Interplay Between Cap Rates and Interest Rates”: https://blogs.cfainstitute.org/?p=25858
- Daniel Calano, “Increase in Interest Rates May Not Ruin the Party, Part II”: https://beta.nerej.com/increase-in-interest-rates-may-not-ruin-the-party-part-ii-by-daniel-calano