🏢 Cap Rate Compression Is Coming Back—But Not Everywhere 👀

📉 Are Cap Rates About to Compress Again? What Investors Need to Know Now 📈

January 10, 2026•3 min read

📉 Are Cap Rates About to Compress Again? What Investors Need to Know Now 📈

🏢 Cap Rate Compression Is Coming Back—But Not Everywhere 👀

Are Cap Rates About to Compress Again? Here’s the Truth

Cap rates have been the central tension point in commercial real estate over the past two years. Rising interest rates pushed cap rates higher, values lower, and deal volume into a holding pattern. Now, as monetary policy shifts and capital slowly re-enters the market, investors are asking the same question:

Are cap rates about to compress again?

The short answer: yes—but selectively. The longer answer is where the real opportunity lies.

What Drives Cap Rate Compression?

Cap rates compress when capital becomes cheaper and more abundant, and when investors are willing to accept lower yields in exchange for stability, growth, or strategic positioning.

The key drivers include:

·Declining interest rates

·Improved debt availability

·Increased investor confidence

·Strong fundamentals at the asset and market level

Today, several of these conditions are beginning to line up again—but not evenly across all property types.

Interest Rates: The Primary Catalyst

The Federal Reserve appears closer to rate cuts than hikes. Even modest reductions in the federal funds rate can materially impact commercial mortgage pricing, spreads, and buyer sentiment.

Lower borrowing costs reduce required returns, which historically leads to cap rate compression, especially for stabilized assets with predictable cash flow.

However, this is unlikely to be a rapid or universal shift. The market is moving from shock to stabilization—not euphoria.

Where Cap Rates Are Most Likely to Compress

1. Industrial & Logistics
Last-mile distribution, IOS, and infill industrial continue to attract institutional and private equity capital. These assets benefit from long-term demand drivers and limited new supply in key submarkets.

2. Essential Retail
Grocery-anchored centers, service retail, and medical-adjacent retail are trading again—often at sharper pricing than discretionary retail assets.

3. Workforce & Affordable Multifamily
Mission-driven housing remains a preferred target for agency lenders and long-term capital. Assets with stable occupancy and modest rent growth assumptions are well positioned for compression.

Where Cap Rates Will Likely Stay Flat or Expand

Office
Unless the asset is best-in-class or owner-occupied, office cap rates remain under pressure due to leasing risk and long-term demand uncertainty.

Over-Leveraged or Transitional Assets
Deals with short lease terms, heavy capex needs, or floating-rate debt will struggle to attract aggressive pricing until execution risk is reduced.

The Capital Markets Reality Check

Cap rate compression does not happen in isolation. Debt markets must cooperate.

Lenders today are:

·More conservative on leverage

·More focused on DSCR and in-place income

·Favoring sponsors with experience and liquidity

This means pricing will improve first for high-quality assets, while secondary deals lag behind.

Investor Strategy for 2025–2026

If you are waiting for “perfect” conditions, you may miss the early part of the cycle.

Smart investors are:

·Locking in stabilized assets before rates fully fall

·Structuring conservative leverage

·Targeting markets with population and job growth

·Planning refinances instead of quick exits

Cap rate compression often begins quietly—before headlines catch up.

Bottom Line

Cap rates are not compressing everywhere, but they are already compressing somewhere.

If you understand which assets lenders favor, where capital is flowing, and how to structure debt intelligently, the next 12–24 months could offer outsized opportunity.

If you want help underwriting, financing, or sourcing assets positioned for compression, now is the time to start the conversation.

https://www.houstonrealestatebrokerage.com/

https://www.houstonrealestatebrokerage.com/houston-cre-navigator

https://www.commercialexchange.com/agent/653bf5593e3a3e1dcec275a6

http://expressoffers.com/[email protected]

https://app.bullpenre.com/profile/1742476177701x437444415125976000

https://author.billrapponline.com/

https://www.amazon.com/dp/B0F32Z5BH2

https://veed.cello.so/FOmzTty6oi9

https://creplaybookseries.billrapponline.com

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Bill Rapp, CRE Broker

I am a Houston commercial broker, with residential experience, as well as a lending background. I have been in the real estate industry for 14 years and counting, and I have worked in many roles within the industry and each has given me a unique perspective of the industry as a whole. My dedication to clients is rooted in this industry knowledge, but also includes my desire to go the extra mile in networking to source off market opportunities for my clients. Me and my team at eXp Commercial have a cutting-edge technology package that gets the widest exposure for each transaction. eXp Commercial offers a nationwide network through which we can deliver the best exposure and professional advice to achieve our clients’ goals while also minimizing their risk. Clients appreciate my methodical method of discovery in our initial consultation. Through which we can get to know each other and their specific’s business’s needs and objectives on a granular level. Our processes help navigate each transaction and its potential pitfalls through to a successful outcome for our clients. It is my stated goal to provide our clients with extensive market analysis and expertise that fosters innovative solutions and rewarding commercial real estate opportunities.

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