Financial market turmoil was a key theme for the fourth quarter of 2018. In addition to the gyrations of the stock market, the rate on 10-year U.S. Treasury notes surged past the 3 percent level into late September and early October. Commercial property is a yield-sensitive investment, and any movement in the long end of the yield curve can affect both buyer perceptions of the relative rates of return on offer as well as the costs of financing.

And yet, even with the turmoil in the financial markets, cap rates were unchanged to down from a year earlier in the fourth quarter. Many investors had expected—almost hoped—that cap rates would increase with the interest rate turmoil, but there are no signs of such an increase.

Click to zoom. © Real Capital Analytics 2019. Data as at 1/22/19. Based on independent reports of properties and portfolios $2.5 million and greater. Data believed to be accurate but not guaranteed. All data and statistics are the sole intellectual property of Real Capital Analytics.

It takes two to tango and likewise, it takes action by both buyers and sellers to move cap rates. Buyers, seeing the surge in interest rates into October, became more cautious in their approach to investments. And rather than react to potentially short-term movements, potential sellers took a wait-and-see position on the market.

Rather than immediately pushing up cap rates, the financial turmoil in the fourth quarter moved buyers and sellers further apart on price expectations. It is deal volume rather than cap rates which makes the first move when market participants cannot agree on prices.

The sale of individual assets fell 3 percent year over year in December and portfolio sales were down 19 percent year over year. Growth for the month overall was positive, though only because of $15.3 billion in one-time M&A transactions, which are less sensitive to short-term fluctuations in interest rates.

Nearing the end of January 2019, the rate on 10-year U.S. Treasury notes has now fallen below the 2.9 percent average level seen in the third quarter of last year before the recent equity market turmoil. Just because interest rates are low again, though, does not mean that buyers and sellers will necessarily agree to transact deals at the same pace of growing deal activity seen during the third quarter. The recent turmoil in interest rates casts a cloud of uncertainty on what happens next, and buyers will be more risk averse than before out of fear of becoming the last buyer at record-low cap rates.

JAMES COSTELLO is a senior vice president with Real Capital Analytics and a member of ULI’s Industrial and Office Park Development Council (Black Flight) product council.