Higher for Longer: CRE Experts Discuss the Impact of Rising Treasury Yields on Market Recovery

All eyes are on the U.S. 10-year Treasury yield and what its rapid ascent could mean for the ongoing recovery in CRE.  A much-talked-about “ceiling” of 4.5% has been reached. Above this level, analysts say the market may at least be forced to reckon with a new lending environment. At worst, it may face a sustained period of repricing. How long the current yield increase will stick is anyone’s guess, but with the 10-year Treasury hitting a 16-month high this week, market participants are taking a longer look at the implications.

We asked Ed Del Beccaro, EVP and San Francisco Bay Area Manager at TRI Commercial Real Estate Services/CORFAC International, in Walnut Creek, California, and Andrew Koller, Research Analyst and Advisor with Wolf Commercial Real Estate/CORFAC International in Marlton, New Jersey, for their thoughts on the bond market’s impact on borrowing costs, lending criteria, and the timing/pace of the recovery.

Del Beccaro believes a higher-for-longer environment will hurt the fragile recovery in at least two ways. “If the 10-year Treasury yield rises further than the current 4.5% rate, it will increase refinancing rates. Billions of commercial real estate low-rate debt from 2020-2021 is reaching maturity, where their interest rates in the 3% to 4% range will rise to 7% and higher.”

But bond yields aren’t the only worrisome factor. “Banks will ask for equity paydowns to lower the loan-to-building value ratio, reflecting the high vacancy rates and lower rents in the commercial sector, especially in the office market. We are still experiencing office and hotel buildings being foreclosed on in the Bay Area. Increased interest rates and increased 10-year Treasury yields will result in more buildings being foreclosed on,” Del Beccaro added.

Andrew Koller agrees that “the broader market becomes more challenged when borrowing costs remain elevated relative to cap rates.” But he points out that the relatively stable market conditions also have an impact. “Through the first quarter of the year, we’ve seen increased activity in buyer and seller inquiries, valuation requests, and listing activity. Rising rates would suggest that it slows down; however, we’ve really been refining assumptions and seeing more focused underwriting,” Koller said.

The natural push and pull between market participants appears to be tightening in response to current conditions. “Lenders want to lend, and rising rates put the squeeze on that. Since seller expectations do not seem to be flexible with rising rates, we’ve seen the most deal friction to that end in recent weeks.”

But Koller isn’t ready to write off the recovery just yet. “We do not anticipate rates continuing to move far beyond 4.5%, and there are reasons for optimism, including the potential impact a new Fed chair could have on future monetary policy direction and market sentiment.”