Most owners think about rising rates in terms of debt service — what's my monthly payment going to look like. That's the wrong first question. The bigger number is what rising rates do to what your building is actually worth, and that number moves whether or not you ever touch your loan again.
Here's the mechanism. Cap rates and the 10-year Treasury move together — not in lockstep, but together. The 10-year has climbed from the low 4% range earlier this summer to just over 5% by mid-September. On September 16, the Fed delivered its first rate hike since July 2023 — a quarter point, unanimous 12-0 vote, target range now 3.75% to 4.00% — and the Fed's own projections point to at least one more hike before year-end. That's not a one-time move. That's a direction.
Cap rates follow, with a lag. San Diego industrial — the strongest asset class in the county — saw cap rates expand from 6.23% a year ago to 6.32% in the second quarter of 2026. Nine basis points doesn't sound like much. Run the math on a property doing $1 million in NOI: at a 6.23% cap rate, that's worth $16.05 million. At 6.32%, it's worth $15.82 million. That's $230,000 gone, on paper, without a single tenant moving out or a single dollar of debt service changing. That's industrial — the sector everyone still wants. Office has moved further and faster: average sale pricing in San Diego fell from $462.67 per square foot in the first quarter of 2025 to $233.08 per square foot in the second quarter of 2026. Some of that is genuine distress pricing. Some of it is the same cap-rate math, just with a lot more room to expand from a much more compressed starting point.
This is where it connects to what I've been saying about this market for a few months now: this is a bottoming market. A real share of San Diego owners bought or refinanced in 2021 and 2022, when rates were near zero and cap rates were compressed to match. Those properties are now worth less than the debt against them, on paper, and every basis point of cap rate expansion since has made that gap wider, not narrower. If you're in that position, rising rates aren't an abstract macro story. They're actively working against you every quarter you wait to deal with it.
The owners who get hurt worst by this are the ones who only think about it at refinance. If your loan matures in the next 18 to 24 months, you need to run the cap-rate-expansion stress test now, not when the lender does it for you. Take your current NOI, apply a cap rate 25 to 50 basis points higher than what you'd have modeled a year ago, and see what that does to your loan-to-value. If the number that comes out doesn't cover a refinance at today's rates, you have three options, and waiting isn't one of them: pay down principal before maturity, bring in equity to recapitalize, or start the conversation with your lender early about a negotiated extension. Every one of those options gets worse the longer you wait, because the cap rate isn't going to do you any favors by holding still.
The owners who get this right are treating rate direction as a planning input, not a surprise. They know their refinance date, they've stress-tested it against a higher cap rate, and they're making moves — paying down debt, locking in extensions, or, in some cases, deciding this is the moment to sell into a buyer pool that still has capital even in a tougher rate environment — well before the wall shows up. The math on your building changed on September 16, whether you refinance this year or not. The only question is whether you're doing anything about it before your lender makes you.
