Slow moving cap rates - by John Rynne
Since the 4th quarter of 2025, 10-year treasuries are up 50-60 basis points compared to the first part of August. As you know, 10-year treasuries are one of the important benchmarks for mortgage interest rates. Right now, mortgage interest rates are 190-200 basis points over the 10-year treasuries. This means that overall capitalization rates are moving slowly upward. The most prominent villain in this is rising fuel prices due to the Iran conflict. These rising fuel prices have permeated the entire economy with higher prices. Before the conflict, the oil price was less than $60 per barrel. Not long ago it was approaching $110 a barrel. As of early August, it was at $78 a barrel.
However, the push upward in interest rates will be buffered by other factors. Nonresidential and residential activity appears to be increasing, which may be due to huge cumulative investments in the economy by AI companies that are racing to get the edge on the market. The tech giants Google, Meta, Microsoft and Amazon are estimated to spend almost $750 billion in 2026 on AI research and development. There are also huge investments by companies like GM in Upstate New York, which in the Buffalo area is spending almost $900 million in manufacturing infrastructure for small-block V-8 engines. This move was precipitated by lackluster EV sales. EV demand has diminished due to the Trump administration’s phase-out of tax credits for electric vehicles. Also, the public’s interest has been deterred by the lack of charging stations and battery storage issues.
Another Upstate success is the Micron Technology semiconductor mega complex facility being built in the town of Clay in the Syracuse metro area. The federal government contributed $6.1 billion; over the next 20 years, Micron is forecasting a total of four large plants on its 1,400-acre campus. Micron has estimated that they will invest $100 billion over the next two decades in the Syracuse area. If that happens, that could create 9,000 permanent jobs and 4,500 non-permanent construction jobs. The multiplier effect in Central New York is estimated to be 50,000 jobs. Based upon some estimates, this will result in the need for 30,000 new housing units. Over 50 years ago, one of my mentors, Hartley White, stated that home construction is the key to a successful local economy. He was a local banker from the old savings & loan industry; I’ll take it a step further by including non-residential construction projects like the $2.2 billion new Highmark Stadium near Buffalo. President Trump has optimistically claimed that $18-$19.2 trillion will be invested in the U.S. by both domestic and foreign sources. The official White House website has reduced these claims to $10.7 trillion, which is still substantial.
The point is that economic vitality will overcome relatively high interest rates, as is evidenced throughout the last 40-45 years. Thus, even if interest rates increase 50-60 basis points, overall capitalization doesn’t necessarily follow. As is shown in the 2nd quarter Rynne, Murphy & Associates, Inc. (RMA) survey, overall capitalization rates remained relatively stable. The RMA survey focus is Upstate New York and western New England. Some cap rates decreased due to supply/demand factors and high-quality tenancy. The biggest changes in the office sector were most notably Class A/R and C with increases of generally 25 basis points. The predominant weighted average cap rate is 8.25% for Class A/R and 11.5% for Class C. For Class A and Class B, the coinciding weighted averages were 7.5% and 9.25%. There were numerous changes to multifamily categories, such as a 25-basis point increase. Part of this is due to increasing rates, which is offset by demand, especially in the Syracuse region. However, burdensome New York state and local rent legislation increased the risk of owning multifamily rental units, especially in urban areas. Urban apartment projects had a weighted average of 7.75%. Suburban apartment projects had a weighted average of 6.5%. There was very limited change in the industrial sector despite the interest rate increases because of solid demand factors. The weighted average was 8.25% for light industrial space. Community retail, which does not include malls, has a weighted average of 8.25% with neighborhood retail weighted average overall rates of 8%.
Check out the ranges at the RMA website for each property category. In summary, despite increasing interest rates, overall capitalization rates are buffered by various demand and supply factors cited above. Check out the 2nd quarter survey at rynnemurphy.com!
John Rynne, MAI, SRA, is president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.