Cap Rates Adjust as the 10-Year Treasury Yield Fluctuates Article originally posted on Globe St. on October 14, 2024 What happens to CRE cap rates when the 10-year Treasury yield changes? According to a CBRE Econometric Advisors review of data since 1995, there are some relationships over time with variations by property type. On average, for every 100 basis points change in the 10-year yield, cap rates shift in the same direction. For example, higher yield, means higher cap rates, and lower yields lead to lower cap rates. From high to low, it’s been 78 basis points for retail; 75 basis points for multifamily; 70 basis points for office; and 41 basis points for industrial assets. The likely reason industrial had such low sensitivity to movements in the 10-year is an odd demand split, according to CBRE EA. Before 2010, industrial wasn’t in high demand by companies or by investors. As a result, there was less cyclical cap rate compression. On the other hand, during the pandemic, the industry became a hot commodity because of e-commerce. The sharply increased demand slowed cap rate growth, boosted NOI, and reduced risk premiums. The result was irony, with extremes of demand both low and high moderating macroeconomic pressures on cap rates. The relationships can change. Spreads between cap rates and 10-year Treasury yields increase during economic slowdowns and decrease during recoveries. CBRE EA thinks that large federal budget deficits will affect the relationships, with cap rates falling at a slower rate and “stabilize at higher levels due to pre-pandemic cap rates” than in the past as interest rates remain higher than in pre-pandemic times. Treasury 10-year yields are only one factor. CBRE EA looked at some of the other factors. The second strongest is the real rent ratio. That is the ratio of real rent values for an MSA in a CBRE EA database to the historical average of real rent over a given time period. According to the firm, the relationships are inversely proportional in this case. From top to bottom, for office it’s -69 basis points; for multifamily, -54 basis points; for retail, -38 basis points; for industrial, -39 basis points; and for retail, -38 basis points. The reactions are weaker for inflation, again inverse relationships, with industrial having the strongest at -41 basis points; retail at -31 basis points; office at -28 basis points; and multifamily at -20 basis points. The Treasury 10-year yield reaction makes sense because it correlates with longer-term interest rates, making properties more expensive to purchase and leaving buyers and investors looking for higher cap rates to consider a purchase.