The Death of the 6-Cap: Repricing Risk in a New Inflation Era

The 6% Cap Rate: From Industry Benchmark to Obsolete Anchor

For many years, a 6% capitalization rate – often called a “6-cap” – served as a common valuation benchmark in commercial real estate (CRE). The cap rate, which equals a property’s annual net operating income divided by its value, indicates the expected yield or return on investment. A 6% cap rate was traditionally seen as a midpoint between lower-risk, lower-return core assets and higher-risk, opportunistic deals. In fact, as recently as 2019 the average cap rate for stabilized U.S. commercial properties hovered around 6.1% (adventuresincre.com), reflecting an equilibrium in a low-interest-rate world. Investors, lenders, and appraisers alike often anchored valuations to this ~6% yield as a shorthand for “fair value” in a normalized market.

However, the reliance on the 6-cap as a valuation anchor is now being upended. The past decade’s ultra-low interest rates and abundant liquidity had already driven many prime assets to trade at cap rates well below 6%. By 2021, trophy multifamily and industrial properties in top markets were selling at cap rates in the 3–4% range – an unprecedented disconnect from the old 6% yardstick. This cap rate compression signaled frothy valuations supported by cheap debt. But with the macroeconomic tide turning in 2022, it has become clear that the “6-cap” paradigm was on borrowed time. Investors who assumed a stable 6% yield environment are now confronting a harsh new reality.

Figure: U.S. all-property average cap rate vs. bond yields. The green line shows cap rates declining to historic lows by 2021 and then rebounding upward after 2022, mirroring a surge in the 10-year Treasury yield (dark bars). Low interest rates enabled unusually low cap rates in 2019–2021, whereas rising bond yields have since pushed cap rates higher. see directory.libsyn.comadventuresincre.com

Structural Inflation and Rising Rates Break the 6-Cap Rule

What changed? In a word: inflation. After the pandemic, inflation in the United States hit 40-year highs, prompting the Federal Reserve to embark on the most aggressive interest rate hiking cycle in decades. From late 2021 to early 2023, the Fed raised its benchmark rate by 476 basis points while the yield on the 10-year U.S. Treasury note jumped roughly 200 bps (kansascityfed.org). This abrupt regime shift – from near-zero rates to a 5%+ Fed funds rate – has fundamentally repriced the cost of capital. A 6% cap rate that seemed attractive when 10-year Treasuries yielded 2% now looks far less impressive with Treasuries around 4%. As one industry expert bluntly put it, “a 6% cap rate in a 2% Treasury environment is fundamentally different than the same cap rate in a 4.5% Treasury world. That delta blows up every underwriting model.” (directory.libsyn.com) In other words, the spread between the cap rate and the risk-free rate is what really matters – and that spread has shrunk dramatically in the new rate environment.

Structural inflation – a sustained period of higher input prices and wages – has raised expectations that interest rates will remain elevated “higher for longer.” This isn’t a brief spike; investors are adjusting to the possibility that 3–4% inflation (instead of the old 2% target) could be the norm in coming years. Higher inflation pushes up bond yields and lender rates, which in turn demand higher cap rates (lower asset prices) to deliver real returns. The result has been a broad-based repricing of CRE assets. By late 2022 and into 2023, property values began falling as cap rates expanded across virtually all sectors. Analysis shows that the 20%+ decline in aggregate commercial property values since mid-2022 was almost entirely driven by rising cap rates (i.e. higher yield requirements) rather than collapsing incomes (aew.com). Put simply, investors now insist on a greater yield to compensate for inflation and interest-rate risk, after a decade in which cheap debt masked those risks.

This repricing marks the “death” of the static 6% cap assumption. No longer can investors take for granted that a stabilized property “should” trade at a 6-cap. The new question is: 6% relative to what? In a low-rate world, a 6-cap offered a generous spread over bonds; in today’s world, a 6-cap might barely clear the risk-free rate, offering little risk premium. The rapid rise in financing costs has also eliminated the phenomenon of “negative leverage” (where borrowing rates were below cap rates). In 2021, for example, one could borrow at ~3% and buy an asset at a 5% cap, pocketing the spread. Now borrowing might cost 6%+ while the same asset’s cap rate has risen to, say, 6% – a breakeven proposition at best. This flip to higher borrowing rates than property yields has put immense pressure on valuations. Many highly leveraged deals completed at sub-6% cap rates during 2020–2021 have become financially strained as debt service costs eclipse property income. The era when cap rates could stay low simply because interest rates were near zero is over.

In short, structural inflation and rising rates have shattered the old 6-cap benchmark. CRE cap rates must reset higher to find equilibrium with the new cost of capital. Industry veterans note that this adjustment is painful but necessary to restore risk-reward balance. As the chief economist of a real estate firm commented, cap rate spreads are finally normalizing and many sponsors are having to “recalibrate assumptions” that were anchored to a low-rate world (directory.libsyn.com). The message is clear: what was once a comfortable 6% yield now carries a very different meaning in an inflationary, higher-rate climate.

The 10-Year Treasury Yield as a New Pricing Floor

If 6% is no longer a magic number, how should investors think about pricing? An emerging pricing anchor is the U.S. 10-year Treasury yield. The 10-year Treasury – often viewed as the risk-free rate for long-term investments – has historically been a major determinant of cap rates. In practice, investors price real estate by adding a risk premium (usually a few percentage points) to the 10-year Treasury yield. During the 2010s, with the 10-year yield oscillating between 1.5% and 3%, a 6% cap rate implied a healthy spread of ~3%+ over the risk-free rate. Today, with the 10-year Treasury around 4%–5%, that same 6% cap offers almost no excess return for the illiquidity and risks of real estate. Thus, the 10-year yield has effectively become a floor for cap rates on the safest assets – and a key signal for pricing across the board.

Empirical data backs this up. According to CBRE research, historical patterns suggest that for every 100 bps increase in the 10-year Treasury yield, cap rates rise by roughly 60 bps on average (rsmus.com). This positive correlation means that the surge in Treasury yields since 2022 has been mirrored by cap rate expansion. Indeed, cap rates have risen, though not always evenly (more on sector differences below). By Q4 2023, the average U.S. retail property cap rate was ~52 bps higher than in mid-2022, and office cap rates were ~71 bps higher – moves consistent with the jump in benchmark yields (rsmus.com). In effect, bond investors and real estate investors now require similar baseline returns, forcing CRE yields up. Market observers note that the 10-year yield is “where investors’ risk premium will price commercial real estate” going forward (rsmus.com). No prudent investor will accept a cap rate equal to or below the 10-year for long; if they did, they could earn a better return buying Treasuries with zero risk.

Notably, some private-market valuations have been slow to adjust to this new reality. In certain core, open-end real estate funds, appraisal cap rates remained unrealistically low through 2022–2024, in some cases even dipping below the 10-year Treasury yield. For example, industrial and apartment property appraisals in NCREIF ODCE funds were recorded at cap rates on par with or lower than the 10-year yield for 10+ consecutive quarters (reit.com). This implies valuations that give no risk premium at all – a situation an industry commentator described as “difficult to fathom” (reit.com). Such a disconnect is widely seen as unsustainable. As Nareit (the REIT industry association) bluntly stated in April 2025, “there is no clear rationale or justification for why industrial appraisal cap rates have consistently been below the risk-free rate… [this] relationship is untenable” (reit.com) (reit.com). In plain terms, cap rates below the 10-year yield are an anomaly that will correct, likely via write-downs in asset values. This reinforces the 10-year yield’s role as a hard floor: over the long run, property yields must exceed the risk-free rate by some margin to attract investment.

Going forward, investors are reorienting their underwriting to spread-based pricing. Rather than fixating on an absolute 6% cap, they are asking: what does this deal yield relative to Treasuries? In previous eras, a typical spread might have been 200–300 bps over the 10-year. If the 10-year is ~4%, that implies prime property cap rates in the 6%–7% range (and higher for riskier assets) – a far cry from the 4% caps common just a few years ago. In fact, many in the industry expect cap rates to remain elevated even if Treasury yields ease modestly, because lenders and equity partners want to see a healthier cushion. As RSM’s analysts noted, even as the Fed eventually cuts rates, “costs will remain high, keeping cap rates elevated”, and a larger spread over Treasuries will be needed to lure investors back into CRE deals (rsmus.com). The net result is that the 10-year Treasury yield has reasserted itself as the baseline for pricing, effectively killing off the notion that cap rates can live in a vacuum.

Diverging Outcomes Across Asset Classes and Markets

While the broad trend is toward higher cap rates across the board, the repricing is not uniform. Different property sectors and geographic markets are experiencing this adjustment very differently. The “death of the 6-cap” is more advanced in some asset classes, whereas others have shown more resilience thanks to stronger income growth or secular demand drivers. Discrepancies have opened up in cap rates not just between sectors, but within sectors (based on asset quality and location), reflecting a granular repricing of risk.

Office properties have seen the most dramatic cap rate expansion. The office sector was hit by a one-two punch: sharply higher interest rates and a structural decline in demand due to remote/hybrid work. Office values were arguably inflated in the pre-2020 era, and the correction since 2022 has been brutal. By early 2024, Class A office cap rates in many markets blew past 8%, and even those levels often assume high-quality, well-leased buildings (cbre.com). For less competitive older offices, pricing has become deeply distressed – cap rates in the “low teens” (10–13%+) are now being seen for Class B/C office properties in weak markets (cbre.com). This implies enormous value destruction (a doubling of cap rate from 6% to 12% cuts value in half, assuming income unchanged). Industry indices confirm the severity: private office values in aggregate have plunged roughly 35–40% from their peak by late 2024 (aew.com), and even that average masks a wide range. It’s widely believed that many office assets will not regain their pre-2022 valuations (more on this in the next section). With office fundamentals uncertain, investors are demanding huge risk premiums, resulting in cap rates that would have been unthinkable a few years ago. Geography matters as well – premier coastal markets like New York or San Francisco have been hard-hit by both remote work and high capital costs, whereas some Sunbelt office markets with growth industries are faring slightly better (though still repriced downward). In all cases, the concept of a safe 6% yield on office is extinct; the spread needed to entice buyers is far higher given the perceived risk.

Multifamily (apartment) properties have also seen cap rates adjust upward, though their story differs from office. Apartments benefited from strong rent growth in 2021–2022 and remain a favored asset class, but they were trading at ultra-low cap rates (often 4% or less in hot markets) during the boom. The rapid rise in financing costs has forced multifamily cap rates back up to more historically normal levels. According to CoStar data, U.S. multifamily cap rates rose about 120 bps from mid-2022 to the end of 2023, settling around an average 6.8% nationally (rsmus.com). Remarkably, that 6.8% is almost exactly where apartment yields stood in late 2019 (6.6%) (rsmus.com) – essentially a reversion to the pre-pandemic norm, erasing the intervening cap rate compression. This suggests that multifamily values have reset from their temporary highs. In high-growth metros that saw huge rent surges (Austin, Phoenix, etc.), values are off their peak but not collapsing, as rent fundamentals still support decent pricing. However, developers have added a lot of new supply in some markets, which combined with higher cap rates has cooled enthusiasm. In gateway cities, rent control and outmigration add further stress. On the whole, apartments are still considered a relatively stable asset class – cap rates in the 5.5%–7% range depending on market and class – but the day of 4% multifamily cap rates is likely over unless interest rates miraculously plunge again.

Industrial and logistics properties have proven the most resilient in value, thanks to robust tenant demand (e-commerce, supply chain reconfiguration) and strong income growth. Industrial cap rates did rise with interest rates, but only modestly so far. Nationally, industrial cap rates have increased by as little as 25–30 bps on average since 2022 (rsmus.com) – a smaller move than other sectors. In some top-tier logistics hubs, cap rates remain in the low-5% range for Class A warehouses (up from perhaps sub-5% before). Why the limited expansion? Explosive rent growth and low vacancies in industrial mean that NOI has been rising, offsetting some of the upward pressure on yields. Investors also view modern logistics facilities as long-term winners in the digital economy, so they have been willing to accept tighter spreads. That said, even industrial is not immune to capital market math forever. Green Street and other analysts caution that certain industrial subsectors and secondary markets may see further cap rate increases as the market digests new supply and as ultra-low appraisal yields adjust upward (rsmus.com). Indeed, a Nareit analysis pointed out that industrial cap rates in private portfolios had been inexplicably lower than the 10-year Treasury for many quarters, labeling that situation “unsustainable” (reit.com). We may therefore see industrial yields drift up into the mid-5% or higher range to maintain proper risk compensation. But relatively speaking, industrial real estate has undergone a much softer correction than offices or even apartments – a testament to its favorable fundamentals.

Retail and other sectors have had more mixed experiences. Retail real estate (shopping centers, malls) was out of favor during COVID but has since recovered some investor interest, especially for necessity-based retail (grocery-anchored centers, etc.). Cap rates for retail assets have expanded moderately – CBRE’s all-property index showed retail cap rates up about 50 bps year-over-year in late 2023 (rsmus.com). This puts many retail centers in the 6.5%–8% cap range, depending on the format and location. Higher-quality retail (think premium grocery-anchored centers in growth markets) might trade closer to 6%, whereas struggling malls or tertiary-market strip centers are well into the high-single-digits or above. The repricing in retail has been more location- and asset-specific: prime assets have lots of bidders (still keeping yields relatively low), while obsolete or vacant retail can hardly find buyers at any cap rate. Hospitality (hotels) saw values rebound strongly in 2021–22 as travel resumed, but rising rates have since cooled the investment market; hotel cap rates tend to be higher (often 8%+) given their operating risk, and that remains the case or higher now. Sectors like self-storage, student housing, senior housing, data centers, etc., each have their own dynamics, but generally most property types are experiencing some cap rate expansion.

There are also notable intra-sector bifurcations. Within each property type, investors are differentiating sharply between “core” assets and everything else. For example, within the office sector, new or recently renovated Class A buildings with high occupancy still attract buyers (albeit at higher yields than before), whereas older commodity office buildings with high vacancies are seeing an almost nonexistent bid. CBRE Investment Management noted a “continued bifurcation” even in favored sectors like industrial logistics – modern facilities with strong tenants command much better pricing than legacy warehouses with functional obsolescence (cbreim.com). This gap in underwriting between “best-in-class” and “challenged” assets has magnified in the current cycle (cbreim.com). Put simply, investors have become far more discerning. With the margin for error narrow, they are paying up for quality and durability of income, and heavily discounting or outright avoiding assets with defects or uncertainty.

Geography is another lens of divergence. Markets that boomed on low cap rates – often high-growth Sunbelt cities – have seen differing adjustments. Some Sunbelt markets (e.g. Austin, Miami) still have strong demand tailwinds, so while cap rates there have risen, they may still be lower than Rust Belt or Midwest markets that historically traded at higher yields. However, an interesting flip has occurred: in the ultra-low-rate environment, there was a convergence of cap rates across markets (even second-tier cities saw very low yields as investors chased any return). Now, with higher base rates, investors are more cautious and risk-sensitive, so local economic strength and stability matter more. We are likely to see wider yield spreads between primary, secondary, and tertiary markets. Early signs show that coastal gateway cities (with more conservative institutional buyer pools) are re-pricing somewhat faster, whereas some secondary markets have lower transaction volume as owners hold out. Over time, expect cap rate rankings by market to revert to historical norms: high-growth, supply-constrained markets will justify lower cap rates than slow-growth, volatile ones – but all at a higher baseline than before.

In summary, the risk re-pricing is uneven: Offices are experiencing the “death of the 6-cap” most acutely, with required yields soaring well above 6%. Multifamily and industrial are closer to “back to life at 6-cap,” after a period far below that, essentially normalizing around the mid/high-5% to 6%-plus range. Retail and niche sectors vary, often ending up somewhere in between. And within every category, quality, location, and future income prospects now drive a greater wedge in pricing. This nuanced landscape means investors and lenders must recalibrate for each deal; broad-brush rules of thumb (like a flat 6% cap assumption) no longer hold. The market is sorting out winners and losers in real time, using cap rates as the sorting mechanism.

Why Some Assets Won’t Revisit Pre-2022 Valuations

A critical implication of this repricing is that certain assets may never return to their peak valuations seen in the ultra-low-rate era. The “cap rate shock” of 2022–2023 has permanently altered the value equation for many properties. Unless interest rates collapse back to their prior lows (an outcome few forecasters predict in the near term), the math simply will not allow those old high prices to pencil out again. Investors should reckon with the possibility that 2021 was the top for a lot of asset values – and those heights were a product of extraordinary monetary policy conditions that are unlikely to be repeated.

One reason is purely mathematical: when cap rates rise, values drop, and recovering those values requires cap rates to compress again or net operating income to grow substantially. For many assets, cap rate compression was the primary driver of appreciation in the 2012–2021 cycle. For instance, an office building’s cap rate might have fallen from 7.5% in 2012 to 5.0% in 2019, doubling its valuation even if the NOI stayed flat. Now that process has gone in reverse. As noted, aggregate CRE values are down ~20% or more primarily due to higher cap rates (aew.com). If cap rates stay elevated, values will not automatically bounce back – it would take exceptional NOI growth to compensate, which is unlikely in sectors like office and retail facing secular headwinds. The AEW Research analysis highlighted that essentially the entire drop in values since mid-2022 is attributable to the rise in yields (cap rates) (aew.com). That implies without a yield reversal, those lost values won’t magically reappear.

Consider the example of an apartment property that was worth $100 million at a 4% cap in 2021 (NOI of $4 million). If today it trades at a 6% cap, that same $4 million NOI supports only about a $67 million value. Unless the property’s NOI can be boosted to ~$6 million (a 50% increase) or the cap rate falls back down to 4%, its value won’t return to $100M. While some growth in income is plausible over time (especially in sectors with inflation-linked leases or high demand), a 50% jump in NOI is a tall order in the short term. And a return to 4% cap environment would likely require a return to zero-bound interest rates, which presumes an economic slump of massive proportions or a deflationary shock – not exactly a scenario conducive to strong real estate performance either. Thus, for many assets bought or valued at the peak, the peak price may represent a high-water mark that won’t be seen again for the foreseeable future. This is particularly true for assets that don’t have strong growth prospects to organically lift NOI.

Office properties again illustrate the point starkly. The secular changes in office demand (remote work, higher vacancies, shorter leases) mean that not only have cap rates blown out, but NOIs are under pressure too. A large share of office buildings are experiencing rising vacancy and falling effective rents, which compounds the valuation hit from higher cap rates. It’s conceivable that some office towers in struggling downtown markets might only be worth 50% (or less) of their pre-pandemic value – and even that value could slip further if leasing doesn’t stabilize. Industry data already show ~37% valuation declines for higher-quality offices since the peak (aew.com), and even steeper falls for lower-quality stock. While values may bottom out and even tick up slightly once the market finds a clearing level, few expect a V-shaped rebound to 2019 pricing. In fact, many older offices will likely need to be repurposed or undergo significant capital investment to attract tenants, effectively resetting their economics entirely. The notion that these buildings will one day trade again at a 4–5% cap (as some did in 2019) is wishful thinking given both the yield environment and occupier trends.

Other assets that were trading on story and speculation – for example, high-growth tech-oriented properties, certain development sites, or leveraged acquisitions predicated on continually falling cap rates – are also unlikely to see a return to the froth of 2021. The late stages of the boom saw investors pay prices that assumed perfection: low yields, low financing costs, and rosy growth. Now, the combination of higher base rates and more conservative underwriting has taken the air out of those pro forma valuations. Assets in sectors with structural challenges (like regional malls in retail, or suburban offices) may never revisit prior highs because the world has changed around them. Even assets in strong sectors, like a multifamily project in a booming city, could have been overcapitalized at the peak – meaning the developer or buyer paid too much expecting rents to rise and cap rates to fall. With financing tighter and cap rates higher, some of those deals are under water. It could take many years of rent growth just to break even on the original investment, let alone sell at a profit.

There’s also the overhang of the debt market. A huge volume of CRE loans – about $2.8 trillion maturing in the next five years in the U.S. (rsmus.com) – will need refinancing at much higher interest rates. Many owners will face a dilemma: either inject equity (to reduce loan-to-value) or sell the asset (potentially at today’s lower price) if they can’t support the new debt costs. This looming refinancing wave will force the issue on valuations. Lower-quality assets with heavy debt may end up in distressed sales, often at significant discounts. Those sale prices will reset market comps and likely confirm that 2021 values are not coming back. In particular, older offices and any asset with functional or financial distress will transact at new market-clearing prices that reflect current financing realities, not the cheap debt era. Once an asset trades at, say, 50% of its 2019 value, it establishes a new baseline that can anchor future appraisals and comps. We are already seeing this selectively – for instance, some office buildings in cities like Houston, Chicago, and San Francisco have sold at steep discounts (40–60% off prior valuations) in 2023–2024. These “price discovery” moments are painful for sellers but necessary for the market to move forward. And they underscore that for certain assets the pre-2022 price level was a mirage sustained by nearly free money, rather than a reflection of enduring real estate fundamentals.

In summary, investors should temper expectations about regaining peak valuations. Real estate is famously cyclical, and values will eventually stabilize and even start climbing again – but from a lower base, and likely at a more modest pace. The structural shift to higher cap rates means the high watermark of the low-rate era may remain unmatched in many sectors. Smart investors are acknowledging this and writing down asset values proactively (as many REITs and institutional owners have done) instead of holding out for an unlikely rebound. The focus is shifting to creating value through operations and asset management (increasing NOI) rather than banking on cap rate compression to bail out returns. Some assets, especially those without growth or facing obsolescence, will not recover their 2021 prices and may require repurposing or restructuring. The industry is coming to grips with the idea that the easy gains of the past decade are gone – and that future appreciation will have to be earned the hard way, through savvy management and real earnings growth, in a fundamentally changed capital market environment.

Implications for Underwriting, Asset Management, and Deal Flow

The demise of the 6-cap era carries profound implications for how real estate investments are underwritten and managed, and for the overall flow of deals in the market. Both investors and operators are now recalibrating strategies to adapt to a higher-yield, higher-risk landscape. The discipline and assumptions that worked in a zero-interest world won’t suffice in the new inflationary regime. Going forward, success in CRE will require a return to fundamentals, more conservative underwriting, and creative approaches to transactions. Here are key ways the industry is adjusting:

1. Underwriting and Valuation: Perhaps the biggest change is in underwriting assumptions. Investment pro formas must reflect higher exit cap rates and more stringent cash flow projections. Gone are the days when one could assume buying at a 5-cap and selling at a 4-cap in a few years for an easy gain. Instead, underwriting models now often assume flat or even rising cap rates at exit, to build in a cushion. This means initial acquisition prices have to be lower to still achieve target returns. Internal rate of return (IRR) hurdles have effectively risen as well, since risk-free returns are higher – investors demand higher unlevered yields from the property itself. Discount rates used in DCF valuations have increased in line with higher Treasury yields and credit spreads, which mechanically lowers the present value of future cash flows (all else equal). Underwriters are scrutinizing rent growth and expense inflation assumptions closely, aiming to be realistic (or even pessimistic) in an inflationary environment where costs are rising and tenant affordability may be stretched. Overall, the underwriting process has become much more rigorous: lenders and equity partners are stress-testing deals for interest rate shocks, shorter lease assumptions, and slower rent growth. As one industry observer noted, the margin for error has essentially vanished – there is little room for overly optimistic underwriting today (directory.libsyn.com) (directory.libsyn.com). Deals need to work on current cash flows, not rosy future scenarios.

In practical terms, expect to see higher debt coverage requirements (e.g. debt service coverage ratios) and lower permissible leverage. Loan-to-value (LTV) ratios are coming down, as higher interest rates reduce loan proceeds and lenders become more conservative. Many acquisitions now involve more equity and less debt, or structured financing like mezzanine pieces, to bridge the gap. Underwriting is also differentiating much more by asset quality – cap rate spreads between Class A and Class B/C properties have widened, and this is explicitly modeled in valuations (no more assuming a mediocre asset can be sold at nearly the same cap rate as a prime asset). All these adjustments reflect a needed “reset” in underwriting standards that market veterans say is healthy in the long run. The industry had arguably gotten lax when money was cheap; now fundamentals rule again. As Integra Realty Resources noted in their 2025 outlook, “after years of speculation and financial engineering, 2025 signals a return to fundamentals… Real estate investments will no longer be defined by access to cheap capital but by their intrinsic value.”(irr.com )Achieving that intrinsic value requires underwriters to be sober about both income and exit multiples.

2. Asset Management and Operations: In a higher cap rate world, asset management takes center stage. When you can’t rely on cap rate compression to boost your asset’s value, the only sure way to create value is to increase the asset’s net operating income. This means landlords and operators are focusing on the blocking and tackling of real estate: leasing, tenant retention, operational efficiencies, and strategic capital improvements. Every dollar of NOI growth is precious, as it can offset some of the valuation drag from higher yield expectations. For example, if market cap rates have moved against you by 100 bps, a strong asset manager will try to counteract that by growing NOI through releasing at higher rents, reducing downtime, cutting unnecessary expenses, or adding ancillary revenue streams. Value-add strategies still exist, but they are less about riding a market cap rate wave and more about true value creation – upgrading a property to increase rents, repositioning the tenant mix, or repurposing underutilized space to higher and better use.

Portfolio managers are also reassessing asset allocations and business plans. Properties or sectors that look structurally impaired (e.g. a half-empty older office) may be slated for disposition or drastic action (such as conversion or recapitalization), rather than holding on and hoping for a market miracle. On the other hand, assets with strong cash flows in resilient sectors might get more capital for expansion or improvement, since those are the ones that can thrive in a higher-rate environment. Asset managers must also grapple with higher operating costs driven by inflation – everything from property insurance to utilities to labor costs has risen. These expense pressures can eat into NOI, so aggressive cost management and perhaps expense pass-throughs (where leases allow) are necessary to defend margins. In short, asset management is returning to a mindset of active stewardship to drive performance, rather than relying on easy money to lift all boats.

Furthermore, with debt service costs up, many owners are prioritizing balance sheet management. This means making tough calls like: do we refinance now at a higher rate, or sell and redeploy capital elsewhere? Should we pay down some debt to reduce interest burden? How do we hedge interest rate risk on floating loans? Some are locking in longer-term fixed-rate debt to avoid short-term rate volatility, even if it means accepting a higher coupon. Others are bringing in partners or additional equity (recapitalizing) to de-lever assets that are otherwise healthy but over-leveraged for the new environment. We are also seeing more openness to loan workouts or extensions – lenders and borrowers negotiating to extend maturities rather than foreclose, in hopes that giving assets time will allow NOI to grow or markets to stabilize. Asset management now includes debt management as a critical task, ensuring properties can survive and operate through this period of higher rates.

3. Deal Flow and Market Liquidity: The repricing has definitely impacted deal flow, leading to a temporary slowdown in transaction volume. Many sellers have been reluctant to transact at today’s lower prices (higher cap rates), while buyers are hesitant to catch a falling knife or struggle to secure financing. In 2023, U.S. CRE investment sales volume was down over 30% compared to 2022 (rsmus.com), reflecting this bid-ask gap. Price discovery is ongoing. However, as we move through 2024 and beyond, some clarity is emerging and the gap is starting to narrow. The longer interest rates stay high, the more sellers have to adjust their price expectations. Distress and forced selling (due to loan maturities or fund redemptions) are also prompting transactions that reset pricing benchmarks. Experienced investors with dry powder are sensing that we may be near a floor in values for many sectors, and are cautiously looking for opportunities to buy at a discount. In fact, some analysts argue that the current period presents “the best entry point for commercial property investors in at least ten years” now that yields are higher and prices (inflation-adjusted) are at their lowest since the post-GFC trough (aew.com) (aew.com). That sentiment is bringing opportunistic capital back into the market.

We can expect deal activity to gradually pick up as the new pricing paradigm is accepted. Initially, this is likely to be in sectors where the outlook is positive (e.g. industrial, multifamily, necessity retail) and for high-quality assets that investors have been eyeing but couldn’t afford during the boom. As those deals transact at cap rates that “make sense” given the 10-year Treasury and credit spreads, confidence should return. Real estate is still awash with capital that needs deployment – private equity dry powder, institutional mandates, etc. – and once yields are deemed adequate, that capital will re-engage. RSM’s outlook suggests that a wider spread between CRE cap rates and long-term bond yields will ultimately draw investors back and could spur higher transaction volume by late 2024 and beyond (rsmus.com). Essentially, when buyers feel they are getting compensated for the risk (with, say, an 8% cap on a solid asset when Treasuries are 4%), the deals will start flowing again.

However, deal structures may evolve in this period. We might see more seller financing, earn-outs, or joint ventures as ways to bridge valuation gaps. Recapitalizations and secondary market trades (LP interests in funds, etc.) are on the rise (cbreim.com) (cbreim.com), offering liquidity without full asset sales. Creative financing like mezzanine debt or preferred equity is being used to fill capital stacks (though at a cost, with mezz debt yields now often 10% (rsmus.com). All of these trends indicate a market adapting to new constraints. Deal underwriting timelines have lengthened, as due diligence is tougher in a volatile market and lenders are more stringent. Cap rate spreads for risk factors (like shorter lease terms or credit risk of tenants) have widened, and buyers are negotiating harder on price to account for things like necessary capex or future leasing risk.

Importantly, investment strategies are shifting in response to repricing. Core investors, who historically relied on low leverage and stable assets, are finding that core yields are much more attractive now than a couple years ago – for instance, unlevered core real estate might yield 6–7% today, which is closer to their return targets. Some core funds that were on pause are resuming acquisitions selectively, since buying at a 6.5% cap with a belief in long-term income growth is a decent proposition. Value-add and opportunistic investors are in their element now, hunting for distress or mispriced assets where they can underwrite solving a problem (leasing up vacancy, redeveloping, etc.) and benefit from buying at a high cap rate basis. They just have to secure financing that makes the project viable, which often means lower leverage or alternative capital sources.

One side effect is that construction and development activity has slowed for now – with higher costs of capital and uncertain exit caps, many projects no longer pencil. This could ironically sow the seeds for the next upswing by limiting new supply in certain sectors. But developers with projects underway are scrambling to complete and stabilize them, knowing that refinancing the construction loan may be challenging if the stabilized cap rate is barely at or below the construction debt interest rate. Some projects will likely be sold or handed over to lenders if they can’t stabilize quickly at required rents.

Overall, the industry consensus is that discipline and prudence must guide decision-making in this new era. As an economist at Moody’s Analytics advised, investors in 2025 and beyond will need to “balance optimism with caution… With liquidity constraints still in play, disciplined underwriting and long-term positioning will be key” (irr.com). This means underwrite for where we are, not where we were; focus on assets and locations with durable demand; and be patient and strategic in deploying capital. The deals that do get done in this environment will likely be those that hit the right risk-return sweet spot – offering enough yield to justify the risk, and backed by solid fundamentals or a clear value creation plan.

Conclusion: Adapting to a Structurally Repriced Market

The “death of the 6-cap” symbolizes a broader structural shift that CRE investors, lenders, and operators must acknowledge and embrace. We have entered a new inflationary era where costs of capital are higher, risk can no longer be glossed over by cheap debt, and underwriting requires true conviction. In this environment, clinging to old benchmarks or hoping for a return to yesterday’s pricing is not a strategy – it’s a recipe for disappointment. Instead, CRE stakeholders should adapt by recalibrating expectations and tactics to align with the new reality of repriced risk.

First and foremost, investors should reframe their return targets in light of higher baseline yields. A deal that was considered a home run with a 6% yield a few years ago might now need an 8% or 9% yield to clear the hurdle rate, given that “risk-free” Treasuries might yield 4–5%. This doesn’t mean abandon real estate – far from it. It means negotiate purchase prices and deal terms that build in appropriate risk premiums. Good opportunities will exist, especially as distressed or motivated sales occur, but selectivity is key. Due diligence has never been more critical: understanding lease structures, tenant credit, debt terms, and capital expenditure needs can make the difference between a savvy acquisition and a value trap. Investors should also be scenario-testing their portfolios and new deals against adverse conditions (e.g. “what if interest rates rise another 100 bps? what if inflation doesn’t fade as expected?”) to ensure resilience.

Second, the focus should shift to cash flow and asset quality. In a market that no longer provides easy appreciation, the dependable income from properties (and the potential to grow that income) becomes the main driver of total return. This means doubling down on fundamental analysis: which locations have enduring demand drivers? Which properties have a competitive advantage (be it location, design, or amenities) that will keep them filled with tenants? Which sectors can pass through inflation via rent increases? For example, properties with shorter lease durations (like apartments or self-storage) can adjust rents more quickly to inflation, providing an inflation hedge, whereas those with long leases may lag. Investors might favor assets with inflation-indexed leases or strong pricing power. Additionally, this is a time to invest in property improvements and operational efficiency – making assets more resilient and attractive so they perform better relative to peers. If the market is only rewarding quality, then one must either hold the highest-quality assets or turn a lesser asset into one through repositioning.

For real estate operators and sponsors, transparency and strategic communication with capital partners are crucial. The game has changed, and business plans should reflect that. Under-promise and over-deliver is a wise mantra: use conservative assumptions and then try to beat them. Sponsors who demonstrate that they can navigate the choppy waters of today – managing debt maturities, maintaining occupancy, and finding creative solutions – will earn the trust of investors. In contrast, those who pretend that the old playbook still works may find capital evaporating. As Jim Dowd of North Capital observed, private real estate markets now demand more active risk management and awareness of macro signals than beforedirectory.libsyn.comdirectory.libsyn.com. Successful sponsors will treat interest rate trends and liquidity conditions as “core components” of their strategy, not just background noisedirectory.libsyn.com.

On a market-wide level, we are likely transitioning to a healthier equilibrium after a period of excess. There will be winners and losers in this process. The winners will be those who adapt swiftly – by acquiring assets at sensible prices, by disposing of or repositioning problematic ones, and by running lean, future-proof operations. They will also be the ones who embrace innovation (for instance, using technology to cut operating costs, or finding new uses for obsolete properties) and who capitalize on new opportunities such as the expansion of secondary market liquidity or distress investing. The losers, unfortunately, may include highly leveraged owners who can’t refinance, or investors who overpaid at the peak and delay taking corrective action. There may be some painful restructurings ahead, especially in sectors like office. But such shake-outs are part of the cyclical evolution of real estate – they ultimately clear the way for the market to function better.

For Limited Partners (LPs) and institutional investors, this is a moment to re-evaluate portfolio strategy. Some may increase allocations to real estate now that yields are more attractive relative to bonds – essentially “re-risking” into CRE at a time when entry pricing is improved. Others might double down on top-tier managers with proven operational capability, knowing that manager skill will make a big difference in outcomes from here. There’s also likely to be more emphasis on niche sectors and alternative strategies that can deliver higher yields (e.g., investing in cell tower sites, life science labs, or real estate debt strategies) as part of the hunt for returns.

In conclusion, the death of the 6-cap is not a cause for mourning but rather a wake-up call. It signals that the easy money era is behind us, and a new chapter has begun – one defined by structural change in the financial environment. To thrive in this chapter, CRE investors should heed the lessons of history and the advice of experts: prioritize fundamentals, insist on sound risk premiums, and stay agile. As the CEO of IRR aptly noted, success now “will require resilience, strategic foresight, and a commitment to creating sustainable value rather than chasing fleeting trends.” (irr.com) Those who adapt their mindset and strategy to this structurally repriced market will find opportunity amid the adjustment. The rules of the game may have changed, but for disciplined and forward-looking real estate players, the next era can still offer abundant rewards – just under a new set of terms.

Looking to navigate this shifting market with clarity and discipline? Contact us for a consultation and learn how we can help you underwrite, reposition, or capitalize real estate opportunities in today’s repriced environment.

Sources: Federal Reserve data; CBRE Research; MSCI/Real Capital Analytics; Green Street Advisors; PERE news; RSM US insights; Integra Realty Resources Viewpoint 2025; Nareit research; AEW Research; industry publications kansascityfed.org aew.com reit.com directory.libsyn.com rsmus.com cbre.com irr.com, among others.

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Looking to navigate today’s real estate market with clarity and discipline? Contact us for a private consultation and discover how we help sponsors, operators, and investors evaluate deals, underwrite opportunities, and structure capital in a repriced environment.

This article is for informational and educational purposes only and does not constitute investment, legal, or financial advice. All views expressed are those of the author and are subject to change based on market conditions. Readers should consult with a licensed financial advisor, real estate professional, or legal counsel before making investment decisions.