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Time: The cap rates for investments can also change with the macro-economic and micro-economic conditions on the local and national markets and the timing and value of the real estate market cycle. If the economy is healthy, consumer spending tends to increase when there is job growth and consumer trust. Strong macroeconomic inputs have a significant impact on all aspects of commercial real property. These include the capital available to finance and buy properties, as well as the actual assets - office space to locate employees, industrial (space that houses the goods people want), retail (space that allows them to buy the goods), and multifamily (space for employees to live). Strong economic conditions can positively impact all these areas. If the economy isn’t doing well, commercial property tends to experience downturns. The interest rate is an economic indicator. In an economy that is growing, rising interest rates are an attempt to reduce inflation. The cash flow from commercial properties is less likely to support mortgage debt. Commercial real estate buyers who use leverage are more likely to accept lower offers. Rising interest rates are usually a sign of a strong economy. However, when rates rise, prices for commercial property tend to drop and cap rates tends to rise. A market's cap rates will fluctuate over time depending on what the economy is doing. This includes the local economy where the most spending and jobs are. It is worth noting that buyers might want to look at historical cap rates trends to assess whether current cap rate trends are appropriate in historical context. Specifically, will the buyer be willing to purchase an asset where cap rates have been lower than they were in the past. They may need to be aware that markets are unpredictable and the cap rate could rise in the future. This may also depend on how the asset's rents appreciate. If the cap rate increases, the property's price may drop.
