- Cap rate drift, driven by rising long-term interest rates, is complicating office sector transactions, widening the bid-ask spread and delaying deal closures.
- Prime assets with stable income are still clearing the market, while weaker credit deals struggle to transact, reflecting increased investor selectivity.
- CRE underwriting models are shifting, with heightened scrutiny on financing, NOI stability, and exit strategy flexibility amid political and economic uncertainty.
Interest Rate Volatility Shakes Office Markets
Rising long-term yields are pushing cap rates higher, per the latest TreppWire podcast, as reported by GlobeSt. The shift stems from the Federal Reserve’s policies, which have increased the term premium and elevated borrowing costs. These changes are now rippling through to commercial real estate (CRE) pricing.
While the bid-ask spread has narrowed from the pandemic-era peaks, Trepp’s Stephen Busch noted that “for CRE, that keeps the buyer-seller gap wide.” In today’s environment, that gap could widen again as market participants recalibrate asset pricing expectations.
Office Sector: Ground Zero For Cap Rate Drift
Office properties remain the most sensitive to cap rate movement due to slower tenant demand recovery and elevated uncertainty. Cap rate drift doesn’t occur uniformly. Assets with stable, predictable cash flows remain in demand, while those with credit risk or weak tenancy face stagnant or falling valuations.
Trepp data shows this bifurcation clearly. Institutional-quality office buildings with strong tenant rosters continue to clear the market, while more speculative or value-add properties are increasingly sidelined. For many of these, buyers are either demanding significant discounts—or walking away entirely.
Get Smarter about what matters in CRE
Stay ahead of trends in commercial real estate with CRE Daily – the free newsletter delivering everything you need to start your day in just 5-minutes
Underwriting And Negotiation Recalibrated
Underwriting is evolving to account for both delayed cap rate adjustment and tighter financing conditions. In key markets like New York, where local politics are adding new layers of risk, appraisers and lenders are tightening assumptions around debt service coverage ratios and loan proceeds.
Business plans that rely on aggressive value-add or refinancing timelines are harder to justify under current interest rates. Liquidity is now concentrated in top-tier assets, and comps are increasingly difficult to establish, making price discovery more opaque.
What This Means For CRE Leaders
For investors and developers, adapting to cap rate drift is critical. Underwriting models must assume longer holding periods, higher financing costs, and a greater need for flexibility in exit planning. Sellers, in particular, must be willing to adjust legacy expectations to meet the market’s new reality.
With the bid-ask gap likely to oscillate in the coming quarters, those with patient capital and disciplined investment strategies are best positioned. Office properties with weaker fundamentals face tough choices—either accept pricing discounts or wait indefinitely for better market conditions.
As the Trepp team put it, the market is now testing where true equilibrium lies between value, yield, and risk.
