Cap Rate Stress Testing: Why a 50bps Move Kills More Deals Than Rate Shocks

Most underwriting models stress-test interest rates and forget to stress-test exit cap rates. That is backward. A 200bps interest rate shock raises debt service by roughly 25%; a 50bps move in the exit cap rate can wipe out 100% of equity returns on a 5-year hold.

The math is elementary but counterintuitive. If you buy a $10M asset at a 6% cap and sell at a 6.5% cap five years later, the same NOI now sells for $9.23M — a 7.7% loss before adding back amortization. At a 7% exit cap, the asset sells for $8.57M. Your IRR doesn't recover from that with cash flow alone.

A defensible cap-rate stress test models three things: (1) a hold-period exit at +50bps and +100bps, (2) market-cycle sensitivity on the going-in cap, and (3) the relationship between exit cap and treasury rates over your hold. The third is what most spreadsheets miss — caps and rates correlate, but with a meaningful lag and a regional dispersion that varies by asset class.

Full guide coming soon. Want a cap-rate-stress-tested IRR on a specific deal today? Run a free screening — every Full report includes a cap-rate sensitivity table.