A review by CBRE Econometric Advisors highlights how commercial real estate (CRE) cap rates respond to changes in the 10-year Treasury yield.
Generally, for every 100 basis point shift in the yield, cap rates move similarly: higher yields lead to higher cap rates, while lower yields result in lower cap rates. The sensitivity varies by property type: retail (78 basis points), multifamily (75), office (70), and industrial (41).
Industrial properties show the least sensitivity due to fluctuating demand. Before 2010, they had low demand, limiting cap rate compression. However, the pandemic spurred e-commerce growth, increasing demand, which moderated cap rate growth despite higher risk premiums.
Economic conditions also influence these relationships. During downturns, spreads between cap rates and Treasury yields widen, while they narrow during recoveries. CBRE EA suggests that large federal budget deficits may slow cap rate declines, stabilizing them at higher levels compared to pre-pandemic times.
Besides Treasury yields, other factors impact cap rates. The real rent ratio, which compares current rent values to historical averages, has a strong inverse effect: -69 basis points for office, -54 for multifamily, -38 for retail, and -39 for industrial. Inflation shows weaker inverse relationships, with industrial (-41) most sensitive, followed by retail (-31), office (-28), and multifamily (-20).
Overall, the correlation between Treasury yields and CRE cap rates reflects how interest rates affect property purchase costs, prompting investors to seek higher cap rates.
Source: GlobeSt.