Liquidity, Labor Markets, and Cap Rate Dynamics: Cross-Sector and Cross-Market Evidence from U.S. Commercial Real Estate

Abstract

This study examines whether an already established parsimonious liquidity framework for nationwide office and multifamily capitalization rates generalizes to multiple sectors and locations. Using transaction-based cap rate data from Green Street, spanning from 2005Q1 to 2025Q3, Vector Error Correction Models (VECMs) are estimated across 20 market-sector combinations comprising five U.S. markets (New York City, Los Angeles, Cincinnati, St. Louis) and four property sectors (Office, Apartment, Industrial and Power Center). Three model specifications are estimated: Model 1 consists of cap rate, fund flow (defined as total mortgage debt outstanding as a fraction of nominal GDP), and unemployment rate. Model 2 adds 10-year Treasury yield to test whether the post-COVID rate-hiking environment restores explanatory power to interest rates. Model 3 replaces unemployment rate with 10-year Treasury yield to assess whether the unemployment spike during COVID damaged the long-run relationship of the variables. The results indicate that the novel fund flow mechanism largely generalizes across markets and sectors, with notable exceptions in the industrial sector, where structural shifts rather than national liquidity conditions largely dominate the movement of cap rates.