Impact of Increasing 10 Year Treasury Yield on Real Estate Returns (2024)

As a result of the uptick in March's inflation report the FED decided to push back any hope for interest rate cuts this summer as anticipated by most analysts. An effect of that decision is that we've now seen bond yields rise again over the last few weeks to all time highs again, which has compressed the yield delta the 10 year treasury and CRE cap rates. In the dynamic landscape of commercial real estate (CRE) financing, understanding the influence of 10-year Treasury yields is crucial for investors, developers, and lenders alike. Serving as a benchmark for interest rates in the financial markets, fluctuations in 10-year Treasury yields can significantly impact borrowing costs and loan terms for CRE transactions. In this article, we'll explore the relationship between 10-year Treasuries and CRE loans, examining how changes in Treasury yields affect financing decisions and investment strategies in the commercial real estate sector.

Overview of 10-Year Treasuries:

At the heart of the bond market, 10-year Treasury bonds play a pivotal role as a key indicator of long-term interest rates. Influenced by a variety of factors including inflation expectations, economic indicators, and Federal Reserve policies, Treasury yields serve as a barometer for investor sentiment and market conditions. When inflation expectations rise, Treasury yields tend to increase to compensate investors for the erosion of purchasing power. Conversely, declining inflation expectations may lead to lower Treasury yields as investors demand less compensation for inflation risk.

Current Market Data:

Since the start of the 2023 the yield on the 10 year has risen about 70 basis points, or 0.70%. Given that multifamily cap rates have moved little if any over the last three months, that means the spread has narrowed to a new all-time low of roughly 90 basis points. In theory, what this means is the average deal has the lowest margin of profit compared to past times since investors could receive very similar cash flow from a bond. What's typically seen is a reversion to the mean which would indicate now might be the best time to buy CRE at a better cost basis in anticipation of a combination of rates falling and the continued cap rate expansion, however slight it might be in this short window of opportunity. Those stubborn land lords who still anticipate peak market rates and now starting to budge on price expectation and willing to negotiate to compensate for these market changes.

Impact on CRE Financing:

The impact of changes in Treasury yields on CRE financing decisions cannot be overstated. Rising Treasury yields often lead to higher borrowing costs, which can affect property valuations, investment returns, and project feasibility. Conversely, falling Treasury yields may present opportunities for favorable financing terms and increased investment activity in the CRE sector.

Case Studies and Examples:

Real-world examples illustrate the tangible effects of shifts in Treasury yields on CRE financing transactions. For instance, during periods of rising interest rates, investors may face higher financing costs and tighter lending standards, requiring them to adjust their investment strategies accordingly. Conversely, in a low-interest-rate environment, investors may capitalize on favorable financing conditions to pursue value-add or development opportunities with higher potential returns.

Conclusion:

As investors, developers, and lenders navigate the complexities of commercial real estate financing, monitoring 10-year Treasury yields is essential for informed decision-making. By understanding the relationship between Treasury yields and CRE loans, stakeholders can anticipate market trends, mitigate interest rate risk, and optimize financing structures to maximize returns and achieve their investment objectives. In today's dynamic market environment, staying informed about interest rate trends and seeking guidance from Investor Relationship professionals like myself are critical steps in navigating the ever-evolving landscape of commercial real estate financing.

About the Author: Nicholas Abraham

About: As a seasoned finance professional I've been investing for a 15 years now and hold a B.S. in economics & finance. Going on the last 5 years now I've focused my efforts on value-add multifamily real estate, transacting on over $40mm across +250 units throughout the southeast sunbelt. I enjoy making new connections and because of my passion for personal finance, help others invest in real estate through passive opportunities in multifamily value add projects in the most sophisticated ways possible.