Increases in the 10-Year Treasury Threaten CRE Cap Rates

Capitalization rates are one of the most telling metrics of a property’s potential profitability. To come up with a property’s cap rate you typically divide the property’s net operating income by the current market value. The 10-year treasury yield is a measurement many financial institutions reference and often times it will have an effect on things like mortgage and interest rates. It is an indicator of what someone’s return on their investment may be. In the past week the 10-year treasury reached over 5%, nearly a 16 year high. What does this steep increase mean and how will it affect commercial real estate capitalization rates and transactions?

In previous years an increase in the 10-year treasury rates resulted in higher interest rates followed by increased capitalization rates. When a property’s capitalization rates increase, the value of the property declines, which puts investors and borrowers at risk of loan delinquencies and leads to tightened lending from banking institutions. Transaction volume is also significantly impacted when these rates increase. The more costly and expensive loans become due to higher rates, the lower the potential return on investment will be and the less likely buyers or lenders will want to make any movement. Some property types are weathering the current market uncertainty better than others, such as the retail sector which currently has historic occupancy levels and rising rents. Being up to date on current trends and knowing the most up to date value of a property is pivotal in an unpredictable market.

Although the challenges CRE properties are facing are real, so are the opportunities for those willing to adapt to evolving market conditions. LPA’s CRE valuation experts work closely with both federally regulated and non-depository lenders and are uniquely qualified to produce USPAP-compliant appraisal collateral independent of the loan process. We take pride in having the most up to date data to accurately perform valuations for our clients. Contact LPA today at?https://lowerypa.com/locations/.