Worry and Promise, perhaps they will cancel each other out and we can close more transactions! If you do not have time to read the entire article, please allow me to extract and apply the relevant.
"Days after the 10-year Treasury yields reached a 16-year high of 5 percent, a CBRE investment report concluded that increased yields on the benchmark Treasury bond have eroded investor confidence in commercial real estate and will contribute to lower values across all asset classes in 2024."
This is not a headline and has occurred throughout 2023, but do you really know why the 10 year treasury is so important?
"The 10-year Treasury yield... sets the borrowing costs for critical aspects of the American economy: government debt, home mortgages, credit card and auto debt, corporate loans, and, of course, commercial real estate loans."
To add, it not set by any one person or group. It is publicly traded, tracked, and subject to market conditions. Specifically, what makes it so important to CRE values?
"Commercial real estate values are uniquely tied to the 10-year Treasury due to the quasi-fixed-income nature of real estate investment."
Fixed Income = pays investors a fixed rate of return until a certain date. CRE can have similar characteristics, but is not liquid or guaranteed by the government.
Therefore, CRE cap rates "requires spreads of around 200 to 300 basis points higher than a Treasury note, so, when Treasury yields increase to 5 percent, it pushes cap rates ... higher, as well."
What is going on with cap rates and valuations?
“We’ve already seen a 20 percent drop in prices over the last year or so. The spike in the 10-year Treasury threatened another 5 to 10 percent drop in prices."
The CRE markets do not move as fast as treasuries, which means "the process of price discovery stretches longer, it takes longer for investors to reset their expectations, and it means investment transactions are slow.”
What happens next in the treasuries market is up to debate.
"We have got this supply of bonds increasing, and maybe the demand for bonds decreasing, and that puts the price of bonds down and pushes yields up."
"CBRE expects the 10-year Treasury yield to fall to 3 percent in 2025 and remain at 3 percent over the next 10 years. There is too much capital in the global economy chasing too few real investment opportunities, so surplus capital will once again find its way into financial markets, boosting prices and reducing yields.”
Worry + Promise = More Uncertainty. How do you deal with uncertainty? I return to my Why, Core Values, and Plans (Business & Life). Collectively, they guide me in times of uncertainty, fear, and doubt. Do you have a plan?
Image from source article at commercialobserver.com