When the 10-year Treasury yield declines, it might initially seem like a positive development. Lowering the risk-free portion of longer-term interest rates should, in theory, make financing more accessible. However, this shift comes amidst a wave of uncertainty engulfing the U.S. financial system and economy, leaving many in the commercial real estate sector cautious.
On the bright side, some immediate benefits are already apparent. Louis Adler, co-chief executive officer at REAL New York, highlights this optimism: “Projects that were previously shelved due to tighter debt markets might now start to move forward again,” he told GlobeSt.com. “Developers who were sidelined by rising rates are re-running their numbers.” This renewed activity suggests that falling yields could breathe life into projects previously deemed unfeasible.
Will Matheson, managing partner at Matheson Capital, echoes this sentiment but with measured optimism. “For commercial real estate, the 10-year falling below 4% will likely lead to an increase in transaction volumes and refinancing activities,” he explains. While sellers may not need to adjust their pricing expectations, Matheson noted that lower rates could provide just enough leeway for buyers to make deals work. Harold Bordwin, principal and managing partner at Keen-Summit Capital Partners, added further context: “A falling yield on that security means that the pricing of real estate debt should follow, and if the pricing of debt is falling, valuations would typically be rising.” Yet he tempers this with a warning: “The issue today is the massive amount of turbulence and uncertainty in the market.”
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The broader economic outlook complicates matters further. Wall Street analysts, including those at JPMorgan, have raised their recession forecasts to 60%, reflecting growing concerns about economic stability. The 10-year yield briefly dipped below 4% before rebounding, underscoring the volatility in financial markets. Jon Siegel, chief investment officer of RailField Partners, captures this uncertainty succinctly: “I think that sitting here on Monday morning, it’s almost impossible to say what the impact on the movement in treasuries is for CRE,” he said. While some brokers may use the rate drop as an opportunity to push more aggressive underwriting strategies, Siegel remains cautious: “The reality is that there is so much uncertainty that we can’t be sure it will last.”
This pervasive uncertainty extends beyond interest rates. Duncan Ellis, North American real estate and hospitality industry practice leader at Marsh, points out additional challenges: “Despite improvement in interest rates, business is a confidence game and people are feeling less certain with the financial markets at the moment, which may cause some to pull back or keep their powder dry for now.” He also noted how external factors like tariffs could exacerbate costs for building replacements and insurance.
Even if lower rates bring short-term relief to CRE financing and valuations, broader economic risks loom large. Will Matheson warns of potential downsides if a recession materializes: “If we enter a recession and you start to see tenants falling on hard times, the losses will outweigh the benefits.” He explained that reduced imports could lead to lease breakages or slowdowns in industrial and retail leasing. Similarly, hotels might face declining travel demand while multifamily properties could suffer from financial pressures on tenants.
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