Graduation Year

2025

Date of Submission

12-2025

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Nishant Dass

Abstract

Commercial real estate cap rates are expected to rise when interest rates increase. Yet during the 2016 to 2018 hiking cycle, cap rates in many markets remained flat or continued to compress. This thesis resolves the puzzle by decomposing Treasury yields into credit spread and term premium components, which reveal offsetting transmission channels that cancel out in aggregate specifications. Using CoStar data spanning 967,794 market-quarter observations across four property types, 390 metropolitan areas, and twenty-five quality classifications from 2000 to 2025, I estimate that widening credit spreads raise cap rates while increases in the term premium lower them. The pooled median credit effect of +8 basis points per 100-basis-point shock conceals substantial regime variation. During the 2021 to 2025 tightening cycle, credit sensitivity reached +67 basis points for Industrial, +57 for Multifamily, and +45 for Office. Retail, by contrast, decoupled from monetary transmission entirely after the Global Financial Crisis. Three identification strategies support a causal interpretation. Bartik shift-share instruments show that pre-crisis credit sensitivity rankings persist across subsequent regimes. High-frequency FOMC surprises indicate that unanticipated policy shocks transmit asymmetrically, with tightening producing stronger effects than easing. Granger causality tests confirm temporal precedence in all property-quality-tier strata. Transmission heterogeneity aligns with financing channels. Office sensitivity reflects historical CMBS dependence. Multifamily uniformity reflects post-crisis agency financing dominance. Industrial variation follows logistics infrastructure exposure. Structural breaks cascade from informationally efficient Gateway markets to smaller markets, with adjustment speeds shaped by transaction frequency. These findings indicate that monetary policy affects commercial real estate primarily through credit channels rather than through risk-free discount rates, and that sector-specific vulnerabilities are obscured by aggregate measures.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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