In this episode of the REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi go back to the commercial real estate future with Senior Economist Xander Snyder, explaining how the emerging CRE cycle most closely resembles the 1990s and what that means for market participants. Drawing on a proprietary analysis of historical data, the team breaks down why cap rates are more likely to move sideways, rather than fall meaningfully, making income growth and operational execution far more important than valuation tailwinds. 

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Listen to the REconomy Podcast™ Episode 134:

“If cap rates don’t decline persistently, income growth and operational efficiency make up a larger share of total returns. Given today’s historically low cap rates, broad sustained declines are unlikely. Higher-for-longer financing costs push cap rates up, while improving fundamentals push them down, resulting in a mostly sideways trend.” – Xander Snyder, Senior Commercial Economist at First American

Transcript: 

Odeta Kushi - Hello, and welcome to Episode 134 of The REconomy Podcast™, where we discuss economic issues that impact real estate, housing, and affordability.

I’m Odeta Kushi, deputy chief economist at First American. Here with me today are Mark Fleming, chief economist at First American, and Xander Snyder, senior commercial real estate economist. Hey Mark, welcome Xander.

Mark Fleming - Hi Odeta. Hi Xander. Since we’re the three Econo-teers today, I assume we’re talking commercial.

Odeta Kushi - Clever.

Xander Snyder - That’s right. It’s great to be here again. And, we are, in fact, talking commercial today.

Odeta Kushi - Well, we’re not just talking commercial. Today, we’re actually going back to the future. And, yes, Mark, I see you smiling already.

Mark Fleming - I’m trying very hard to resist doing the obvious thing here. Huey Lewis, Eric Clapton. Should I keep going? No doubt.

Odeta Kushi -  And I’m trying very, very hard to keep us from doing 15 minutes of movie references.

Xander Snyder - May I propose a compromise? We’ll use the movie title once, and then we’ll actually go on to talk about cap rates.

Mark Fleming - Fine. I promise we’ll keep the movie references to a minimum. But, joking aside, there is a serious point we’re getting to. We’ve entered a new commercial real estate cycle, and the way cap rates behave this time around may look less like the last 25 years and more like an earlier period that many people in the industry haven’t really lived through professionally.

Odeta Kushi - Exactly. This conversation builds on some recent work Xander has done looking at cap rate behavior across cycles. The core idea is that, even as the commercial real estate recovery strengthens, this next cycle may not deliver the same valuation tailwinds people have come to expect based on their lived experience.

Xander Snyder - That’s right. And it’s worth starting with why these historical comparisons matter right now. We’ve talked elsewhere about 2026 being the year the commercial real estate cycle really takes hold. But this cycle is unlikely to resemble the last two expansions most professionals are familiar with, largely because many weren’t working in the 1990s or earlier.

Odeta Kushi - Right. Things changed around the year 2000. Since then, rates have mostly trended downward, with only a brief interruption during the Global Financial Crisis. Over roughly the past quarter century, the two major commercial real estate cycles we’ve experienced were accompanied by meaningful cap rate declines. But that experience isn’t necessarily normal. It’s just the one most market participants are familiar with.

Xander Snyder - When you extend the data further back, a more nuanced picture appears. Long stretches of sideways, uneven, or even rising cap rates are far more common than sustained declines. In that context, the last 25 years look more like the exception than the rule.

Mark Fleming - So, today’s episode is about resetting expectations. We’re not forecasting outcomes, but understanding what type of cycle we may be in and what history suggests about how cap rates typically behave in cycles that resemble today.

Odeta Kushi - Let’s take a step back because we keep mentioning cap rates. Cap rates measure the yield on a commercial property. It’s the income generated relative to the price of the property. Higher cap rates generally mean lower prices, and lower cap rates mean higher prices, given the same income.
When cap rates decline, they provide a valuation tailwind. If cap rates move sideways this cycle rather than falling, that tailwind disappears. We covered the mechanics of cap rates in more detail in episode 95, which we’ll link in the show notes.

Xander Snyder - Over the last 25 years, declining cap rates have meaningfully boosted investment returns. But historically, sustained cap rate declines have been rare. Over a longer time horizon, cap rates spent decades at higher levels than what we’ve grown accustomed to since the early 2000s.

Mark Fleming - From a long historical perspective, the extremely low cap rates observed around 2021 during the pandemic look like an outlier, not a baseline. They were great while they lasted, assuming you didn’t buy at peak prices, but they’re not something we should expect to return to as the norm.

Odeta Kushi - That matters because falling cap rates can mask operational issues like higher expenses, weaker leasing, or inefficient management. When cap rates don’t fall, returns rely much more heavily on income growth and execution.

Xander Snyder - That’s the key takeaway. If cap rates don’t decline persistently, income growth and operational efficiency make up a larger share of total returns. Given today’s historically low cap rates, broad sustained declines are unlikely. Higher-for-longer financing costs push cap rates up, while improving fundamentals push them down, resulting in a mostly sideways trend.

Mark Fleming - Okay, so if anyone really wants to go a layer deeper, we’ve put together a companion piece on the First American Economic Center that lays out the long-term cap rate and interest rate trends visually. It’s a helpful way to see the historical patterns we’re talking about here. For those watching the video version of the podcast, here it is. But, if you’re listening, we will have links in the show notes or you can watch the video version. So, Xander, you mentioned the 1990s earlier and how many of today’s CRE professionals aren’t old enough to have been working in the 1990s. And, for the record, I’d like to point out I’m the only Econo-teer here on this podcast that was actually in the workforce in the 1990s. It was an okay decade, although not nearly as good as…

Odeta Kushi - Yeah, yeah, we know the 1980s were very predictable.

Xander Snyder - What I think makes the 1990s a useful comparison to today is what led up to the early 1990s recession. So, the savings and loan crisis, which drove that recession, followed an inflation-driven interest rate shock that exposed a number of underwriting weaknesses, which meant that loans were being made based on overly optimistic assumptions about income and values. And this led to strained financial institutions. Again, similar in structure today, although clearly there are some differences if we were getting into the detail of that. After that recession in the early 1990s ended, rates didn’t fall steadily. They moved unevenly and largely sideways throughout most of the rest of the expansionary period — or the rest of the 1990s — until the next recession.

Mark Fleming - And going back to that definition that Odeta stated earlier in the episode, that means that returns during the period were driven far more by income growth than any valuation increases. Less magic earnings from prices going up, more from hard work in improving operations and growing the top side.

Xander Snyder - That’s right. And the point here isn’t that history will repeat itself exactly, but that the mechanics of that period may be more informative than the post-2000 experience today. And most of us don’t have direct experience operating in that kind of an environment. We conducted a poll on a recent webinar that I hosted and found that a majority of the audience, roughly 60%, entered the commercial real estate industry in the 2000s or later. So, that means that 60% of all people on that call only knew declining cap rates.

Odeta Kushi - That’s actually really interesting. Okay, so we’ve talked a bit about long-term cap rate trends, but what about interest rates? Interest rates get a ton of attention in commercial real estate discussions and for good reason, but historically there are limits to how much they explain cap rate movements.

Xander Snyder - Exactly. Over the long run, changes in interest rates explain only about a quarter of cap rate movements. The relationship is statistically meaningful, but it’s just not especially strong. So, if you check out the First American Economics blog, this companion post we’re talking about has a chart showing this relationship between cap rate movements and interest rate movements over time. And we’ll have a link to this in the show notes.

Mark Fleming - And, for the video watchers, cue the chart. In some periods, the relationship breaks down entirely, with interest rates moving one way, while cap rates move the other. And this really underscores that most cap rate movement is driven by forces beyond interest rates alone.

Odeta Kushi - Which brings us to another important takeaway. Historically, the availability of credit has mattered more than the price of credit.

Xander Snyder - Commercial real estate is a credit-intensive asset class, meaning most commercial property purchases rely heavily on borrowed money, rather than all-cash transactions. So, when commercial mortgage credit is readily available, transaction activity tends to increase and cap rates tend to fall. When credit tightens, activity slows and cap rates tend to rise, even if interest rates themselves are relatively stable.

Mark Fleming - And, of course, it’s also worth noting that the post-Global Financial Crisis period was unusual in terms of the decade-long sluggish broad economic growth despite historically low interest rates. The most recent period shouldn’t be treated as the norm.

Odeta Kushi - All right, that’s another point in the “this cycle is the exception, not the rule” bucket. I think that makes us exceptional. All right, moving right along. Another important point worth highlighting that we’ve already referenced throughout the episode is about experience — or in many cases, the lack of it.

Xander Snyder - Most commercial real estate professionals entered the industry during a period dominated by declining cap rates — long, persistent declining cap rates. And that shapes intuition, it shapes expectations, often subconsciously, but it shapes assumptions.

Mark Fleming - Which means many people have limited lived experience operating in environments where cap rates move sideways or rise for extended periods. And, yes, maybe it’s wise to listen to that colleague with all the lived experience who likes decades like the…

Odeta Kushi - My goodness, we get it, we get it — the 1980s. All right, well that dynamic may make the adjustment to this new cycle a little more challenging, even if the underlying economics are sound.

Xander Snyder - If cap rate compression has always been part of the return story, then losing that valuation tailwind requires a meaningful adjustment in how returns are achieved and evaluated.

Mark Fleming - So, this new commercial real estate cycle is already underway, but it may look more like the 1990s than anything that we’ve seen in the last 25 years.

Odeta Kushi - Indeed, rates are unlikely to fall substantially throughout this cycle, which matters because cap rates are one of the main ways investors translate income into property values. Some segments may see declines — there are various asset classes within commercial real estate, particularly where fundamentals improve — but broad valuation tailwinds appear limited at this time.

Xander Snyder - Exactly. And that shifts the focus toward income growth and operational execution as the primary drivers of return in the cycle.

Mark Fleming - And the broader lesson really is about expectations. History suggests that sideways or uneven cap rate movement is far more common than persistent declines, even if that’s not the version of history most of us have lived through throughout our careers.

Xander Snyder - Right. So that means that both the challenge and the opportunity in this cycle is earning returns the good old-fashioned way — through operational efficiency, through growing income, discipline, and rolling up your sleeves and executing like a professional.

Mark Fleming - Ooh, I got an idea. Translation: show up, do the reps. Wax on, wax off. Wax on, wax off. No, no.

Odeta Kushi - Mm-hmm. In this cycle, cash flow rules everything around the deal.

Xander Snyder - Hey, was that just a Karate Kid reference followed by a Wu-Tang song reference? Wu-Tang Clan?

Mark Fleming - Wait, wait — what? There was another reference besides mine? I completely missed the Wu-Tang.

Odeta Kushi - Subtlety is my strong suit, and we are in a heated ‘80s versus ‘90s reference battle at the moment, so I wanted to make sure I got the last word there. True, true — but there’s a long year ahead of us.

Mark Fleming - Win the battle, yet to win the war. That’s just so true.

Xander Snyder - Mmm.

Odeta Kushi - And, on that note, thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you’d like us to feature in the future, you can email us at economics@firstam.com. And as always, if you can’t wait for the next episode, you can subscribe to our Econ Center at firstam.com/economics or connect with us on LinkedIn. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.