In the finance world, the 10 year treasury yield is often viewed as the barometer of economic health and an indicator of future interest rates. As it climbs, the effects are felt through the different sectors of the economy, including the commercial real estate market.
The 10-year treasury yield represents the interest rate at which the U.S. government borrows money for a ten-year period by selling treasury bonds. It is influenced by a myriad of economic factors, including inflation expectations, federal reserve policy, and overall market sentiment.
The recent uptick in the 10-year treasury yield has been driven by numerous factors including expectations of higher inflation, a potentially faster economic recovery, and changes in federal reserve policies.
One of the most immediate impacts on the commercial real estate markets is the increase in borrowing costs. As treasury yields rise, so do interest rates for commercial loans. With every 100 basis point increase in long-term interest rates results in a 60 basis point rise in commercial real estate cap rates. With the increased cost of borrowing, investors and builders see returns begin to drop, which inevitably pushes values down to compensate for lower returns. The added pressure of alternative investments becoming more attractive will add to the downward pressure of commercial real estate values.
Investors and developers in the commercial real estate sector should closely monitor the evolving economic landscape and adapt their strategies accordingly. As with any investments, a diversified approach, thorough due diligence, and a long-term perspective can help mitigate the effects of interest rate fluctuations.
Nick SolomonNick Solomon is a multi-family specialist in the firm’s West Los Angeles office. As an associate, he works with investment properties throughout the Korea Town and Mid-City area. He has dedicated his time to becoming an expert in his market’s trends. Nick comes from an entrepreneurial and marketing background, which aids his real estate skills. Nick graduated from the University of Arizona with a bachelors in interdisciplinary studies. He is a firm believer in hard work, collaboration, dedication, and transparency with his clients.
