The Federal Reserve has signaled the possibility of two rate cuts before year-end and another in 2026, potentially lowering the Federal Funds Rate by a full 1%. For real estate investors, especially those using Delaware Statutory Trusts (DSTs), this could have a meaningful impact on property valuations across asset classes.

At Fortitude Investment Group, we actively monitor these shifts because interest rates and capitalization (cap) rates are closely correlated. As interest rates rise, cap rates generally increase, which pressures values lower. We saw this in 2022, when rapid rate hikes caused multifamily values to fall 20% or more from their late-2022 peaks. Conversely, when interest rates decline, cap rates often compress, driving values higher. 

Multifamily: The Clear Beneficiary

Today’s question: How do interest rate cuts impact multifamily real estate values? 

Cap Rate Compression Effect: If an investor acquires multifamily properties today at a 6% cap rate, and five years later market cap rates fall to 5%, the valuation could rise by 20% even if net operating income (NOI) remains unchanged.

NOI Growth Effect: Layer in conservative NOI growth of 3% annually (about 15% over 5 years), and that same property could experience a 38% increase in value. 

Illustration: 
NOI today: $1,000,000 ÷ 0.06 cap = $16.67M valuation
NOI in year 5: $1,150,000 ÷ 0.05 cap = $23M valuation
Total increase: 38% 

This combination of income growth and cap rate compression is exactly what our current DST multifamily portfolios are targeting. 

Other Sectors and Rate Cut Impacts

Industrial

Positive Tailwinds: Logistics, warehousing, and e-commerce facilities benefit from lower borrowing costs for both landlords and tenants. 

Risk Factor: If the economy slows despite rate cuts, demand could soften. However, long-term fundamentals (reshoring, supply chain resilience) remain strong. 

Office

Mixed Outlook: Rate cuts may help valuations stabilize after years of decline, but structural challenges like remote/hybrid work persist. 

Opportunity in DSTs: Select medical office and high-quality suburban properties may see sharper recovery than central business district towers.

Retail

Stabilization Potential: Neighborhood and necessity-based retail (grocery-anchored centers) could benefit from cap rate compression.

Caution Zone: Large malls and discretionary retail still face secular headwinds, so rate cuts may provide only modest relief. 

Healthcare & Specialty Assets

Healthcare Facilities: Typically perform well in rate-cut environments because tenant demand is less cyclical. Lower rates can encourage REIT and institutional buyers to expand acquisitions, boosting exit valuations.

Specialty (student housing, self-storage, senior living): Highly sensitive to cap rate moves. A 50–100 basis point reduction in borrowing and exit cap rates can significantly boost valuations in these niche sectors.

The Big Picture for DST Investors

Rate cuts do not just reduce borrowing costs—they also reprice risk and change investor psychology. When Treasuries yield less, capital often flows back into real estate, driving valuations higher.

For DST investors, this creates: 

Potential Value Upside: Existing portfolios may appreciate more rapidly if cap rates compress. 

Improved Exit Scenarios: Sponsors can sell assets at higher valuations, benefiting investors at full-cycle events. 

Buying Window Today: Because values have not yet fully adjusted, investors entering DSTs now may capture discounted pricing and future upside as rate cuts materialize. 

Conclusion

Interest rate cuts could be a meaningful tailwind for Delaware Statutory Trust investors.

Multifamily stands out as the clearest beneficiary, with industrial and healthcare following closely. While office and retail face sector-specific challenges, lower rates could still provide support to valuations.

At Fortitude Investment Group, we continue to monitor Federal Reserve actions and market fundamentals to position our investors for long-term success. Contact us today to learn more! 

Sources:

1. Correlation Between Interest Rates & Multifamily Cap Rates:

Important Disclosures:
*This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”).

*There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal.

*DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million exclusive of primary residence, and/or possessing an annual income of over $200,000, or $300,000 with a spouse and expects the same or greater for the current year) and accredited entities (generally described as an entity owned entirely by accredited investors and/or owning investments in excess of $5 million). Please check with a qualified CPA or attorney to determine if you are accredited.

*Past performance is no guarantee of future results. *Diversification does not guarantee returns and does not protect against loss.

*Potential cash flow, potential returns and potential appreciation are not guaranteed.