What’s Really Behind Rising Cap Rates, According to a Philadelphia Appraiser

Written by:

Steve Marcinuk

Date:

17 Dec 2025

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Commercial real estate has faced a sharp slowdown as higher interest rates disrupt decades-old valuation models. Cap rates have risen, deal volume has dropped, and investors have pulled back. Yet Carlo Batts, Principal & CEO of Reduxx Group, who appraises hundreds of properties across the Philadelphia region, says the real story is not about weak demand or distressed sales. Instead, he argues, the market’s apparent reset is being driven almost entirely by the increased cost and scarcity of capital.

“I don’t think that distress transactions have repriced the market,” Batts says. “Cap rates are more a challenge of lending dynamics now, compared to what’s actually happening with demand.”

Understanding Cap Rate Compression

Batts emphasizes that the core issue is mechanical: as borrowing costs rise, cap rates must adjust unless there is a corresponding surge in demand or a willingness by investors to accept lower returns. Neither, he says, is happening at the pace needed to offset higher rates.

“For cap rates to stay the same after interest rates go up, you’d need demand to increase or for investors to accept lower equity returns,” Batts explains. “But demand has mostly held steady. It’s the cost of capital that’s driven changes in the market.”

This distinction is critical for lenders, developers, and investors. Many are treating the current market as if it’s driven by distressed sales or collapsing fundamentals, when in reality, the main obstacle is access to affordable capital. Batts contends that this misunderstanding leads to inappropriate pricing strategies and missed opportunities.

Stability in Core Markets

Batts points to Philadelphia’s core neighborhoods as an example of how fundamentals can remain stable even when headlines focus on distress. In central Philadelphia—what he defines as “river to river, South Street to Vine Street”—cap rates are holding in the four to six percent range.

“Anything within that box generally is just solid real estate,” Batts says. “When you move farther out, cap rates start to increase incrementally.”

He notes that despite concerns about office vacancies or slower construction, these central areas haven’t seen significant changes in values or forced sales. For stabilized assets in these markets, applying distressed-sale pricing doesn’t reflect current reality. The market itself hasn’t broken; it is simply adjusting to more expensive capital.

Philadelphia vs. Sun Belt Markets

Batts also challenges the narrative that Philadelphia is losing ground to Sun Belt cities. While population growth is slower in Philadelphia than in places like Texas or Florida, he argues that the quality of employment matters more than raw numbers.

“Our population growth is lower than Sun Belt markets,” Batts says. “But their job growth is often in lower-wage sectors, not among higher earners.”

According to Batts, markets that retain or attract higher-wage earners tend to have more resilient long-term demand for both commercial and residential real estate. In contrast, markets dependent on lower-wage job growth may post impressive population numbers but don’t always translate that into stable property values.

A Multi-Perspective Appraisal Approach

Batts’s analysis is shaped by his background in banking and his experience across multiple roles in real estate. Before founding The Reduxx Group in 2011, he apprenticed at Wilmington Trust, learning to evaluate properties from the perspectives of banks, developers, brokers, and property managers.

“To be a great real estate appraiser, you have to view it from the eyes of the bank, the developer, the broker, and the property manager,” Batts says.

He explains that his firm values properties based on prevailing market conditions rather than distress scenarios, and typically lacks access to the full credit situation of the assets they appraise. This reinforces his view that most valuation changes are tied to capital structure and lending terms, not a collapse in underlying demand.

Looking Ahead: Opportunity in Mispricing

With the Federal Reserve signaling a possible pause or even cuts to interest rates in the coming quarters, Batts believes the current environment may present opportunities. Properties priced conservatively due to tight lending conditions could become undervalued if capital becomes more available and affordable. Investors who can distinguish between true demand weakness and temporary capital constraints, he suggests, will be best positioned to benefit as the market adapts.

In Batts’s view, understanding the real driver behind current pricing is the cost of capital, not distressed sales, which will be essential for making sound investment decisions in the months ahead.