Recent interest rate signals are reshaping capitalization rates across U.S. commercial real estate (CRE), tightening spreads, slowing deal flow, and forcing appraisers to rethink valuation assumptions.

New data shows cap rates hovering near interest rate levels, with spreads as narrow as 23 basis points in Q3 2025—a dynamic that is redefining risk pricing across every major asset class.

For the first time in more than a decade, U.S. commercial real estate is navigating a prolonged higher-for-longer interest-rate environment. The result is a dramatic recalibration of capitalization rates across all major CRE sectors. Recent data shows that the average CRE interest rate is 6.57%, while the average cap rate is 6.34%, leaving a razor-thin spread.

This unusually tight relationship between borrowing costs and asset yields is sending clear signals: risk is being repriced, valuations are adjusting, and the role of the real estate appraiser is becoming more complex—and more critical—than ever.

The New Interest-Rate Reality

The CRE industry has spent the past two years adjusting to elevated rates, and the adjustment is far from over. Deloitte’s 2026 outlook notes that interest rates have become the number one concern for industry leaders, rising from seventh place the year prior. With nearly $1 trillion in CRE debt maturing in 2026, refinancing pressures are intensifying, and cap rates are responding accordingly.

The relationship between interest rates and cap rates is foundational: higher rates typically push cap rates upward, reducing property values. However, the relationship is far more nuanced, influenced by inflation expectations, risk premiums, and market cycles. Today’s environment is a case study in that nuance. Rates have risen sharply, but cap rates have not expanded at the same pace, leading to compressed spreads that challenge traditional valuation models.

Sector-by-Sector Cap Rate Shifts

Recent early 2026 underwriting data from CRED iQ reveals how cap rate movements differ across asset classes, reflecting sector-specific fundamentals and investor sentiment.

Industrial: Tightest Spread, Highest Refinancing Risk

Industrial assets—long the darling of CRE—show the tightest spread, just 35 basis points. This signals that investors still prize the sector’s fundamentals, but it also exposes industrial owners to refinancing risk. With cap rates barely exceeding borrowing costs, any softening in demand or increase in vacancy could push valuations downward quickly. Appraisers must scrutinize tenant credit, lease rollover schedules, and market absorption trends more closely than ever.

Multifamily: Stabilizing but Sensitive

Multifamily cap rates have begun to stabilize at higher levels, but regional divergence persists. Investors are prioritizing resilience over speculation, underwriting more conservatively, and avoiding excessive leverage. Appraisers must now incorporate more granular rent growth assumptions, especially in markets facing supply surges or regulatory uncertainty.

Office: Cap Rates Rising Faster Than Other Sectors

Broader market data shows that office cap rates are rising more rapidly due to hybrid work pressures and elevated vacancies. With interest rates high and fundamentals weak, office valuations are under the greatest downward pressure. Appraisers must account for longer lease-up periods, higher TI/LC costs, and structural shifts in demand.

Retail: A Tale of Two Markets

Retail continues to bifurcate. Grocery-anchored centers remain strong, while commodity big-box and mall assets face headwinds. Cap rates are rising, but not uniformly. Appraisers must differentiate between necessity-based retail and discretionary-driven formats, each responding differently to rate pressures.

Hospitality: The Outlier with the Widest Spread

Hospitality posted the widest spread between cap rates and interest rates at 106 basis points. This reflects both higher perceived risk and stronger income-growth potential. Hotels benefit from dynamic pricing and post-pandemic travel demand, giving their investors confidence that NOI can grow even in a high-rate environment. Appraisers evaluating hospitality assets must now weigh short-term volatility against long-term revenue resilience.

The Impact on Deal Flow and Market Liquidity

Higher rates and tighter spreads have significantly slowed transaction activity. Q3 2025 saw approximately 9% fewer deals, 18% lower balances, and 50% fewer loans compared to Q2.

This decline in liquidity creates challenges for appraisers, who rely on comparable sales to anchor valuations. With fewer trades, appraisers must rely more heavily on income-based approaches and market participant interviews to triangulate value.

Why Cap Rate Compression Matters

The narrow spread between cap rates and interest rates is more than a statistical anomaly; it is a signal of market stress. When cap rates fail to rise in tandem with borrowing costs, several implications emerge:

• Investors accept lower risk premiums.
• Property values remain artificially elevated.
• Refinancing becomes more difficult.
• Lenders tighten underwriting standards.
• Appraisers face heightened scrutiny.

The cap rate/interest rate relationship is influenced by risk premia (also known as risk premiums) and market cycles. Today’s compressed spreads suggest that risk premia may be mispriced, especially in sectors facing structural challenges.

The Evolving Role of the Real Estate Appraiser

Appraisers are now operating in one of the most complex valuation environments in decades. Several trends are reshaping their work, such as a greater emphasis on forward-looking analysis.

With historical comps less reliable, appraisers must incorporate more forward-looking metrics, including interest rate forecasts, market absorption trends, tenant credit risk, and capital-expenditure requirements.

They must also expect increased scrutiny from lenders and regulators. As refinancing risk grows, lenders are demanding more detailed valuation support. Appraisers must justify cap-rate selections with deeper market evidence and clearer explanations of risk adjustments.
Volatility in rates and cap rates is prompting more frequent portfolio revaluations, especially for institutional owners and REITs. Appraisers must be prepared for accelerated timelines and evolving assumptions.

Stress testing is becoming increasingly important. Appraisers are increasingly asked to model higher cap-rate scenarios, NOI declines, interest rate shocks, and exit-cap sensitivities.

These stress tests help lenders and investors understand downside risk in a rapidly shifting market.

What to Expect in 2026

As the market moves through 2026, appraisers will play a central role in helping the market recalibrate valuations.

If interest rates stabilize or decline, cap rates may follow—but not uniformly. Sectors with strong demand drivers (industrial, multifamily, hospitality) will remain more resilient. Office and discretionary retail will continue to see upward cap rate pressure.