By Zane Willman | Associate Advisor, CCG Real Estate Advisors
There is currently an 96% probability that the Federal Reserve will cut rates in the next month. In real estate, no single factor drives investor behavior more than the movement of interest rates. When the Federal Reserve adjusts rates, the ripple effects extend far beyond borrowing costs — they shape property values, investment appetite, and the pace of market activity.
Interest Rates and Their Role in Valuation
Interest rates represent the cost of capital. When rates are low, investors can borrow cheaply, which increases their willingness to pay higher prices for income-generating assets. When rates are high, the opposite occurs: borrowing becomes more expensive, margins tighten, and buyers require greater returns in exchange for deploying capital.
The relationship between rates and values is not one-to-one, but the directional impact is undeniable. Rising rates place downward pressure on prices, while falling rates tend to lift them.
Cap Rates as the Bridge
The cap rate, or capitalization rate, is a simple concept: it’s the ratio of a property’s net operating income (NOI) to its purchase price. While interest rates determine the cost of debt, cap rates reflect the expected return for equity investors.
Here’s where the two intersect:
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As rates rise, investors generally demand higher cap rates to offset the increased cost of borrowing.
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As rates fall, competition intensifies, cap rates compress, and property values rise.
Cap rates therefore act as the bridge between capital markets (interest rates) and asset-level performance (NOI).
Why This Matters for Investors
Successful investors understand this dynamic not as a momentary fluctuation, but as a cycle. Assets themselves may not fundamentally change, but their valuations shift depending on where rates and cap rates stand in relation to one another.
This is why institutional players often deploy capital during periods of higher rates, when values are softening, and hold through the recovery as rates fall. The same building, generating the same income, can be worth vastly different amounts depending on the broader cost of capital.
The San Diego Lens
San Diego offers a clear example of these fundamentals. The region’s multifamily market is defined by strong long-term demand drivers: limited land supply, desirable coastal climate, and steady population and employment growth. These structural advantages provide resilience even when national interest rate policy is unfavorable.
Today, pricing across the market has adjusted downward as higher rates have kept many buyers on the sidelines. Yet this environment also illustrates the principle above — values are a function not only of property performance, but of where we are in the capital cycle. Investors who understand this positioning recognize that today’s softer pricing may look very different once rates begin to ease and competition returns.
To Summarize
The takeaway for investors is simple: today’s high-rate environment creates tomorrow’s opportunity. Prices are softer, competition is lighter, and cap rates are elevated — conditions that rarely last. This is why sophisticated investors don’t wait on the sidelines; they acquire when rates are high and hold through the cycle as rates fall.
The same property generating the same income can be worth significantly more in a lower-rate environment. Timing that cycle correctly is how real wealth is created in real estate.
For investors focused on San Diego’s multifamily market, now is an opportune moment to position capital before the next wave of demand pushes prices higher.
