Cap Rate Shock Index: How a 50-BP Rate Hike Repriced Commercial Real Estate in 50 MSAs

Introduction

Over the past 18 months, U.S. commercial real estate has undergone a “real estate repricing” in response to rising interest rates. A roughly 50 basis point (0.50%) increase in benchmark rates – part of a broader tightening cycle – has sent a shock through property valuations. This cap rate shock index measures how sharply capitalization rates (cap rates) have moved across markets and sectors, revealing shifts in commercial real estate market dynamics. Investors and developers are witnessing higher cap rates, lower asset values, and evolving MSA investment trends. At the same time, these financial pressures are spurring architectural innovation: from adaptive reuse of underperforming buildings to new design priorities focused on efficiency and tenant experience. This article examines the financial and architectural impacts of this cap rate repricing across industrial, retail, office, and multifamily sectors in 50 major U.S. metropolitan areas, highlighting regional disparities and emerging trends shaping the next phase of the cycle.

Financial Impact: Rising Rates, Cap Rate Expansion, and Repricing of Assets

Interest rate hikes have translated into significant cap rate expansion across nearly all property types. As borrowing costs rose, investors demanded higher yields, pushing cap rates upward (and property values downward) to maintain spread over debt. On average, cap rates have increased by about 125 basis points for most asset classes since early 2022, with office assets hit even harder – well over 200 bps of cap rate expansion in offices. This reflects a sharp reset in pricing: for context, an increase of 100–150 bps in cap rate can equate to roughly a 15–25% drop in asset values (assuming stable income). The repricing has been swift and uneven, creating a “cap rate shock index” effect that varies by sector and market:

• Office: Office cap rates have risen the most, surging more than 200 bps above 2022 levels on average. By late 2024, Class A office yields in many markets exceeded 8%, whereas less-competitive Class C offices saw distressed cap rates in the low teens. Such a jump from, say, ~5.5% to 8%+ signifies a dramatic value decline. Not surprisingly, office properties have experienced some of the steepest price drops among asset classes, and many transactions simply stalled as buyers and sellers recalibrate. (In fact, some beleaguered office buildings in major cities have seen 20–30%+ value declines, as reflected in appraisal and trading data.) Investor sentiment remains cautious in this sector, with ongoing financial distress and high vacancy putting continued upward pressure on office cap rates.

• Industrial: Industrial real estate, the darling of the pandemic era, is not immune to rate-driven repricing. After historic cap rate compression in 2021, industrial cap rates expanded by roughly 100–150 bps off their lows through 2023. According to Real Capital Analytics, the average U.S. industrial cap rate was about 5.7% in August 2023, up ~50 bps year-over-year from the cycle trough. Newer, high-quality logistics facilities in top markets still trade at relatively low yields (around the mid-5% range), while older industrial assets or secondary market warehouses are now often in the 6–7%+ cap rate territory. Asset values have adjusted downward accordingly – industry data showed all-property prices falling ~10% year-on-year as of late 2023, with industrial values contributing to that slide. Even so, industrial fundamentals (high demand, rent growth) cushioned the blow, and by H2 2024 cap rates had stabilized and even ticked down in some prime markets as investors regained confidence in future NOI growth.

• Multifamily: Apartment investments also felt the cap rate shock, though to a lesser degree than offices. Nationally, multifamily cap rates rose by an estimated 80–100 bps from the 2022 market peak into 2023. CoStar data shows cap rates increasing ~0.4 percentage points (40 bps) or more between Q2 2023 and Q3 2024. In practical terms, an average apartment cap rate that was ~5.0% in 2022 might be in the mid-5% to low-6% range today. Indeed, one survey put the national average multifamily cap rate around 6.1% in 2024, up from the mid-5% range previously. These shifts correspond to notable value declines – multifamily asset prices were down about 12.2% year-over-year as of mid/late 2023. Higher financing costs and slowing rent growth in some markets have crimped investor returns, causing many would-be sellers to hold assets rather than trade at discounts. Still, multifamily cap rate expansion has been moderate relative to the 400–500 bps jump in interest rates since 2022, reflecting that strong renter demand and rent increases have partially offset the impact. As analysts at CohnReznick noted, overall cap rates rose 50–200 bps in most markets since 2022, much slower than the Fed’s rate hikes, because real estate often lags capital markets. Notably, by early 2024 the pace of increase had slowed, and some Class A multifamily in top cities even saw slight cap rate compression late in 2024 amid renewed investor optimism.

• Retail:  The retail sector has experienced the most modest cap rate movement in this cycle. Cap rates in retail (especially essential retail and single-tenant net lease properties) expanded only ~25–50 bps in the past year for private-capital deals, and 50–75 bps for larger or institutional retail assets. Many well-located retail properties benefited from surprisingly resilient consumer spending and limited new supply. For example, strong tenant sales and rent growth in certain segments have helped keep retail cap rates relatively stable – the sector’s cap rate increase is roughly half that of other property types over the last 12–18 months. National average retail cap rates hover around the low-7% range (up slightly from the mid-6% range pre-rate shock). Pricing for retail assets fell about 11% year-over-year as of late 2023, a smaller decline compared to apartments or offices. Investors still prize well-performing grocery-anchored centers and single-tenant stores (which offer long-term, bond-like income), so capital flows into necessity-based retail have held up better, tempering cap rate expansion.

  
  

Asset Values and Investor Returns: By raising cap rates, the interest rate shock has eroded asset values across the board. An all-property price index tracked by MSCI/RCA was down roughly -9.9% year-over-year by August 2023, with sectors like multifamily and office posting double-digit annual declines in value. From the market peak in early 2022 to late 2023, many assets saw values drop 15–20% (and more in the case of distressed offices). For investors, rising cap rates mean new acquisitions can be made at higher initial yields – potentially improving long-term returns – but only if purchase prices adjust low enough. In 2022 and early 2023, that re-pricing was slow and painful: debt costs jumped so fast that many deals no longer penciled out, resulting in negative leverage (where borrowing rates exceeded property yield). Buyers stepped to the sidelines and sellers were reluctant to cut prices, leading to a “bid-ask spread” standoff in the market. Transaction volume plummeted as a result. By mid-2023, U.S. commercial property sales were down ~60% year-over-year. For the full year 2023, investment volume is estimated to have declined about 37% compared to 2022 – a testament to how rising rates froze deal-making.

Encouragingly, as the market accepts the new pricing reality, capital is beginning to adjust. Sellers increasingly recognize that values have reset (even if not at 2021 highs), and some distressed owners are forced to liquidate, providing price discovery. Investors armed with dry powder are looking for opportunities in this higher-yield environment, especially in sectors that have stabilized cap rates. By late 2024, sentiment had improved: overall cap rates leveled off in H2 2024, and most investors believe cap rates have peaked for this cycle. Capital flows are slowly returning – 2024 saw a modest 9% uptick in sales volume after 2023’s steep drop, and a further increase is expected in 2025 as price expectations between buyers and sellers converge. As one analysis noted, repricing has largely run its course for most sectors, giving buyers and sellers more confidence to transact.

Crucially, the spread between cap rates and interest rates has normalized somewhat, restoring balance to underwriting. Where a year ago many properties were “priced out” – marketed at cap rates well below loan interest rates – now pricing has adjusted to more realistic levels. If a deal’s cap rate is significantly lower than current financing rates, few buyers can justify the investment given expensive debt. This dynamic forced either prices down or buyers to increase equity, until yields made sense again. Today, with cap rates ~125–200 bps higher and debt costs potentially stabilizing, new acquisitions can achieve positive leverage or at least meet return hurdles in many cases. In short, the market is finding a new equilibrium. Some investors are even anticipating interest rate cuts in late 2024–2025, which could boost values and generate outsized returns for those who buy at today’s repriced cap rates. This expectation of future cap rate compression has started to fuel renewed activity, especially in resilient sectors like industrial and multifamily where rental growth prospects remain strong.

Architectural Impact: Design Priorities, Adaptive Reuse, and Evolving Tenant Expectations

Beyond the balance sheets, the valuation shock is reshaping strategies in architecture and space design. When asset values fall and underwriting becomes stricter, developers and property owners are compelled to get creative with their real estate. Every square foot must work harder to justify its cost. The result is a wave of innovation in how spaces are designed, utilized, and repurposed. Several key architectural and design trends have emerged as responses to the new financial reality:

• “Flight to Quality” and Amenity-Rich Design: In an environment where tenants have more choices and owners are competing to retain value, there’s a premium on quality. Modern, efficient, amenity-rich buildings are outperforming older, outmoded properties. For example, Class A office buildings (often new or recently renovated with top amenities) have been far more resilient – in late 2023 their vacancy was around 7.9% versus 23.4% for Class C offices. This stark gap underscores that companies are gravitating to inspiring, high-quality spaces to entice employees back to the office, even as overall demand for space shrinks. Landlords are responding by upgrading designs: adding collaborative lounges, outdoor terraces, fitness and wellness facilities, modern HVAC and touchless tech, and attractive interior design. High-end multifamily developments are similarly emphasizing amenities (co-working areas, package lockers, community spaces) to justify rents and maintain occupancy. In retail, experiential design is key – many shopping centers are incorporating open-air layouts, dining and entertainment zones, and Instagrammable decor to draw foot traffic in the e-commerce era. In short, the repricing has reinforced a bifurcation: premium, well-designed assets continue to attract tenants and investors (lower cap rates), whereas commodity buildings with generic design and deferred maintenance now trade at steep discounts. This is prompting a wave of renovations and repositionings as owners invest capex to move their assets up the quality curve.

• Space Efficiency and Flexibility: With cost of space elevated, both tenants and landlords are focused on efficiency – making every square foot count. Many companies downsizing their office footprint (due to hybrid work) are redesigning workplaces to be flexible, multipurpose environments. Open floor plans with movable partitions, convertible meeting areas, and hoteling desk systems allow tenants to do more with less space. Developers are similarly designing new buildings with adaptable floorplates that can cater to a range of tenant needs (from collaborative tech startup layouts to more traditional setups) without costly retrofits. In multifamily, space-efficient unit designs (such as micro-units or units with flexible rooms for home offices) have gained traction, as developers look to maximize rentable units and tenants seek affordability without sacrificing functionality. Industrial developers, facing high land costs and lower allowed site coverage in some urban markets, have even started exploring multi-story warehouses and higher clear heights to pack in more logistics operations per square foot. In sum, tight capital and higher required returns are driving a “form follows finance” philosophy: architectural designs must optimize space utilization, reduce operating costs (e.g. via energy-efficient systems and sustainable design), and ultimately improve the property’s income profile. Those design elements directly support higher NOI, which helps mitigate the effect of higher cap rates on value.

• Adaptive Reuse and Redevelopment: One of the most visible architectural outcomes of the current market dynamics is the surge in adaptive reuse projects. When an asset’s market value falls below the cost to maintain or finance it, converting it to an alternative use can unlock new value. This is happening most notably with underutilized office buildings. Office-to-residential conversions have accelerated rapidly in many cities, turning vacancy-plagued office towers into much-needed apartments. In fact, from 2021 to 2024 the annual number of apartments planned from office conversions jumped from just 12,100 to over 55,000 – a more than fourfold increase. Office-to-apartment projects now make up about 38% of all future adaptive reuse units nationally, the largest share of any building type. Major metros like Washington D.C., New York, Chicago, Dallas, and Los Angeles are leading the trend with thousands of new residential units in former office buildings. This wave is fueled partly by the office sector’s distress (and $150+ billion in office loans coming due by 2024) and partly by strong multifamily demand. Architecturally, these conversions present challenges – from carving out light wells to meet residential code, to adding operable windows and kitchens/baths in old office floorplates – but they represent a creative solution to rejuvenate obsolete properties. Beyond offices, other adaptive reuse examples include dead malls transformed into mixed-use “town center” developments, old big-box retail stores turned into last-mile distribution hubs, and aging industrial structures repurposed as trendy office lofts or maker spaces. Such projects not only mitigate financial losses for owners by tapping new markets, but also benefit communities by revitalizing blighted structures. City planners and architects are increasingly collaborating on these conversions, recognizing adaptive reuse as a sustainable path forward (often cheaper and greener than demolition and ground-up construction).

• Tenant Experience and Evolving Expectations: Rapid changes in property values and market conditions have also shifted tenant expectations and preferences. In offices, tenants now expect landlords to partner in creating a compelling reason to occupy physical space. This means design elements that promote wellness (better ventilation, natural light, greenery), collaboration (varied meeting hubs, social zones), and convenience (services like concierge, app-based booking for amenities). Many businesses are also seeking flexibility in leases and space design, given uncertainty – they want the ability to expand or contract space, or even the option to terminate, so buildings designed for multi-tenant flexibility (with easily re-demise-able floors, shared amenities, etc.) are in demand. In retail, tenants (especially experiential and dining concepts) look for spaces that can be customized and that have engaging atmospheres to draw customers – landlords are working with architects on features like interactive art, communal patios, and event spaces to meet those needs. Multifamily renters, for their part, now commonly expect coworking areas, high-speed internet, and smart home features as standard, reflecting the work-from-home culture. Space is now as much a service as a commodity, and the design must facilitate that service. Properties that fail to meet evolving expectations risk longer vacancies and must compensate with lower rents (driving values down further). Thus, we see a self-reinforcing loop: valuation pressures prod owners to upgrade design and amenities, and those upgrades in turn are necessary to preserve income streams in a more competitive, repriced market. As one workplace study noted, the future of offices lies in flexible layouts, collaborative spaces, and a focus on community – elements that architecture must deliver to keep buildings relevant.

  
  

In summary, the architectural impact of the cap rate shock is a push toward higher-quality, more adaptable, and alternative-use real estate. Design and development decisions are being filtered through a stricter financial lens. Projects with excessive frills or inefficient layouts may no longer secure funding as easily, whereas designs that lower operating costs, attract/retain tenants, or create new revenue streams are favored. This pragmatic, innovation-driven approach to architecture is turning challenges into opportunities – breathing new life into assets and, in the long run, adding resilience to portfolios in volatile market conditions.

Regional Disparities and MSA Investment Trends

The effects of the interest rate and cap rate shock have not been uniform across the country. Regional disparities are evident, with some metro areas experiencing a far greater repricing impact than others. Local economic trends, supply-demand fundamentals, and pre-shock valuation levels all influence how each MSA’s investment trends have evolved. A “cap rate shock index” might show wide variation by market – for instance, a high-growth Sunbelt city may exhibit a milder shock than a slow-growth Rust Belt city or a coastal tech hub with specific challenges. Key patterns include:

• Gateway vs. Secondary Markets: Major gateway cities (New York, Boston, San Francisco, Los Angeles, etc.) generally entered this period with lower cap rates (higher values), reflecting their global appeal and liquidity. When interest rates spiked, those low-cap-rate markets had to adjust more in absolute terms to restore yield spreads. Even after recent increases, though, gateways still command premium pricing relative to other regions. For example, CBRE’s surveys continue to show gateway markets maintaining lower cap rates than secondary/tertiary markets in most sectors. An investor buying a prime office or apartment in Manhattan or San Francisco might still see a cap rate several percentage points below that of a similar asset in a smaller market like St. Louis or Cleveland. However, the gap has narrowed. Gateway cap rates rose more sharply in 2022–2023 (since they had farther to go). Some secondary markets, by contrast, already had higher cap rates and slower rent growth, so their adjustment was relatively smaller in percentage terms. As an illustration, multifamily cap rates in the Northeast region jumped about 112 bps between 2022 and 2023, while the Midwest saw a smaller ~85 bps rise. Coastal urban offices – hit by remote work and high supply – saw some of the largest repricing, whereas, say, suburban office in certain Sunbelt cities (with shorter leases and already higher yields) saw a comparatively lesser shock. Investor capital flows have shifted accordingly: some institutional investors rotated out of pricey coastal markets in favor of Sunbelt and Heartland metros where initial yields are higher and growth prospects solid. Meanwhile, opportunistic players are targeting distressed assets in gateway cities, betting on a rebound. The result is an investment landscape that is more geographically diversified than a few years ago, as everyone reconsiders risk/reward in light of repricing.

• Sunbelt and High-Growth Markets: Many Sunbelt MSAs (e.g. Dallas, Austin, Nashville, Raleigh, Phoenix, Miami) boomed during the low-rate era, with cap rates compressing significantly thanks to inbound migration and strong job growth. When rates rose, these markets initially proved somewhat resilient – robust rent growth and demand helped offset the rising cap rates. In some Sunbelt cities, cap rates moved less dramatically or have already started to compress again as soon as financing stabilized. For instance, Southeastern U.S. multifamily cap rates increased only modestly (~30 bps on average) between 2022 and 2023, which was on the low end nationally. That suggests investor appetite remained strong for apartments in the Southeast, buoyed by population growth and a relative affordability edge. That said, Sunbelt markets are not monolithic; those that experienced frenzied development (oversupply) are seeing more pressure on valuations. Phoenix’s multifamily cap rates, for example, rose notably as new deliveries increased vacancies. On the whole, MSA investment trends favor markets with strong employment and demographic momentum – capital is still flowing to places like Dallas-Fort Worth (which led the nation in planned office-to-residential conversions, highlighting investors’ long-term confidence). In contrast, capital has pulled back from markets with stagnant economies or specific headwinds (for example, some Midwest markets reliant on slower-growing industries). Thus, the cap rate shock index might register lower in high-growth MSAs because future income growth expectations temper the need for high cap rates.

• Industrial Hub Disparities: The industrial sector provides a clear example of regional cap rate variation post-shock. Top-tier logistics hubs with port access or large population bases have retained very low cap rates, while less in-demand locations trade much higher. For instance, as of Q3 2024, Los Angeles industrial properties averaged cap rates around 5.3% and the Bay Area (San Francisco) around 5.9% – extremely low yields thanks to insatiable tenant demand and limited land. By contrast, a Midwest distribution market like Chicago averaged industrial cap rates of about 8.3%, considerably higher due to greater supply and slightly softer demand dynamics. Table: Industrial Cap Rates in Selected Markets (Q3 2024)

Metro Area	Industrial Cap Rate (Avg, Q3 2024)
Los Angeles, CA	5.3%
San Francisco, CA	5.9%
New York, NY	6.3%
Chicago, IL	8.3%

Source: MMCG database; prime logistics facilities in coastal markets show significantly lower cap rates than those in many interior U.S. markets, even after recent increases.

This spread in cap rates between, say, Southern California and the Midwest widened during the repricing period – Chicago’s industrial cap might have been 7% a couple years ago and rose to 8%+, whereas Los Angeles went from ~4.5% to just low-5%. It highlights that investors assign different risk premiums by region. Coastal markets with supply constraints and high rent growth potential are still priced richly. Secondary markets offer higher going-in yields, which some investors now find attractive as interest rates plateau. We also see regional nuances within sectors: Office cap rates, for example, blew out in the most challenged downtown office markets (San Francisco, with its tech tenant retreat, saw office cap rates spike dramatically), whereas markets like Houston or Charlotte – while higher cap rate to begin with – didn’t see as extreme a swing because they were already priced for more risk. Retail is highly local as well: premier retail corridors in gateway cities (think Manhattan’s Fifth Avenue or Los Angeles’ Rodeo Drive) continue to trade at low yields, whereas aging suburban malls in smaller cities carry very high cap rates due to uncertainty about their future.

• Emerging Trends by Region: The repricing has also surfaced new regional investment trends. Investors are increasingly data-driven, creating metrics (like a custom “cap rate shock index”) to identify which MSAs might be over- or under-corrected. Markets with the biggest cap rate jumps may present buying opportunities if their fundamentals are sound and the sell-off was driven largely by rate fears. For instance, some urban office markets in the Northeast and West Coast saw cap rates blow out by 250+ bps; opportunistic investors are hunting there for deep discounts, albeit cautiously. On the other hand, some Sunbelt multifamily markets saw cap rates rise only modestly (or even compress again in late 2024), suggesting competition for those assets remains fierce – developers in those regions continue to build, and investors accept lower yields for growth. Regionally, capital flows are tilting toward markets like the Carolinas, Texas, and Florida for development, while the Midwest and parts of the Northeast see more redevelopment and value-add plays (like conversions or renovations) rather than new construction.

Regional multifamily cap rate trends from 2021 to 2023, showing cap rate compression in 2022 followed by broad expansion in 2023 across all U.S. regions. The Northeast saw the largest increase (~112 bps), while the Midwest had the smallest (~85 bps) in that period. Nationwide, multifamily cap rates rose around 83 bps from 2022 to 2023, illustrating a significant real estate repricing due to interest rate shocks.

Notably, local policy and urban planning responses differ as well. Some cities (e.g. New York, Washington D.C.) are actively supporting adaptive reuse and offering incentives to convert or upgrade properties, which can mitigate the shock’s impact on values. Others are taking a wait-and-see approach. These differences will influence how quickly each city’s real estate market finds a new equilibrium. For example, Washington D.C. is at the forefront of office-to-residential conversions with over 5,800 units in progress, potentially softening office vacancy and stabilizing values there faster than in a city with comparable office distress but fewer conversions.

In sum, the cap rate shock has been a nationally shared phenomenon, but its intensity and lasting effects are very much market-specific. Smart investors and developers are now tailoring their strategies by MSA: deploying capital where repricing has overshot fundamentals, or doubling down on regions with secular growth despite the tighter financing climate. These MSA investment trends underscore an important point – commercial real estate is a local game. Even in a globally influenced rate environment, each metro’s unique supply, demand, and innovation profile will determine how it rides out this cap rate shock and what opportunities emerge from it.

Conclusion

The past 18 months have delivered a jarring “cap rate shock” to U.S. commercial real estate, as a 50 bp interest rate rise (amid a broader rate surge) forced a rapid repricing of assets. Financially, we observed cap rates leap and values slide across industrial, retail, office, and multifamily properties – a necessary reset to realign investor returns with higher borrowing costs. Architecturally, this valuation shift has acted as a catalyst for change: prompting developers to rethink designs for efficiency, landlords to repurpose underutilized buildings, and all stakeholders to elevate the quality of space offered. The commercial real estate market dynamics are clearly in flux, but not in freefall. In fact, there are signs that the worst of the repricing is behind us – cap rates appear to have peaked for most sectors, and both investors and tenants are regaining confidence in a newly value-conscious market.

Moving forward, emerging trends point to a more disciplined yet innovative real estate landscape. Investors are poised to benefit from higher going-in yields, especially if financing costs stabilize or fall. Many are actively scouting for opportunities in markets or sectors that over-corrected. Developers and architects, for their part, are embracing adaptive reuse and sustainable design as strategies to unlock value and meet evolving market needs. Tenant-centric features – flexibility, wellness, technology integration – will likely be standard in new projects, given the proven “flight to quality” during this downturn. Regionally, we will continue to see divergent recovery speeds: some MSAs will bounce back faster (those with diversified economies and proactive adaptation), while others may lag if fundamental challenges persist.

For investors and developers reading on InnoWave Studio’s platform, the key takeaway is one of strategic adaptation. The “cap rate shock index” of 2024–2025 is a story of resiliency as much as volatility. Those who navigated the storm by adjusting portfolio strategies, insisting on sound underwriting, and finding creative ways to add value to properties are emerging stronger. As interest rates eventually ease (with the Federal Reserve expected to begin cuts in the coming periods), there is potential for some cap rate compression and value recovery. Prudent investors are positioning now for that next phase – whether it’s locking in acquisitions at today’s higher cap rates or investing in capital improvements that will make their assets competitive in a post-repricing world.

Ultimately, the repricing of commercial real estate has reaffirmed timeless principles: real estate is cyclical, location and quality matter, and adaptability is crucial. By understanding the recent cap rate shifts financially and architecturally – and by learning the lessons of regional disparities and innovation – investors and developers can make informed decisions in this new landscape. The shock may be subsiding, but its impact will shape a more efficient, tenant-attuned, and resilient real estate market in the years ahead. For those who can marry sound investment fundamentals with creative design and reuse strategies, the next cycle offers not just challenges, but tremendous opportunity in the dynamic 50-MSA tapestry of American real estate.

Sources:

• CBRE Cap Rate Survey, 2024 – CBRE Research

• Emerging Trends in Real Estate, 2024 – PwC and ULI

• Green Street Commercial Property Price Index, 2024 – Green Street

• New Uses for Office Buildings: Life Science, Medical and Multifamily Conversions – NAIOP Research Foundation

• Architecture Billings Index, 2024 – American Institute of Architects

• Industrial Space Demand Forecast, Third Quarter 2024 – NAIOP Research Foundation

• 2024 Multifamily Outlook – Freddie Mac Multifamily

• 2024 North America Investment Forecast – Marcus & Millichap Research

• Five Forces Shaping the Future of Retail – CBRE Research

4 Star Office