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  • Krone Weidler

Soaring Yields and Tighter Lending: A Reset in the CRE Landscape

As we observe the current financial trends, it's evident that the real estate sector is poised for a significant shift. The rise in 10-year Treasury yields is a key factor influencing this change, signaling a potential cooling period for real estate values in 2024. This scenario presents a unique opportunity for astute investors to leverage the anticipated market dislocations.

Falling Property Values The surge in 10-year Treasury yields, reaching a peak of 5%, has led to a decrease in confidence for commercial real estate (CRE) investment. This shift is anticipated to result in a notable drop in property values by 2024. Predictions include a 40% decline in national office property values, a 28% decrease in multifamily, 23% in retail, and a 10% reduction in industrial properties. Already, office properties have experienced an average 30% depreciation, with variations depending on the property grade.

Cost of Capital As Treasury yields increase, the cost of securing capital naturally rises. This change is causing banks to adopt tighter lending practices, which in turn is expected to elevate capitalization (cap) rates and potentially lower commercial property values. This trend has led to a revision of growth forecasts for CRE investment volumes in 2024, transforming an initially expected 15% growth into a projected 5% decline.

Economic Factors The jump in 10-year Treasury yields can be attributed to robust economic performance and government financial policies. Factors like low unemployment and GDP growth, despite being positive, are coupled with persistent inflation and job growth concerns. These elements contribute to ongoing apprehension about sustained high interest rates.

Further Complications Adding to the complexity is the larger-than-expected growth of the U.S. federal deficit, indicating increased government borrowing. With major bond buyers like the Federal Reserve reducing their Treasury holdings, bond prices have dropped, and yields have escalated as investors seek higher returns to compensate for the heightened risks associated with increased borrowing and inflation fears.

➥ The Takeaway Despite the current downturn, projections suggest a decrease in yields to 3% by 2025, which could spark a rebound in property values. An expected global capital surplus could further boost market prices. Investors who strategically invest during this downturn, particularly in resilient sectors such as multifamily, industrial, and retail, may reap significant rewards from the eventual market recovery.

Krone Weidler, Founder & Principal

Cadre Healthcare Realty Advisors

1095 SE 177th Place, Suite 404-M14

Summerfield, FL 34491

C: (813) 842-2365

O: (866) 355-3594

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