Appetite For CRE Investment Is Tested As 'Yippy' Bond Traders Push Rates

Yields on 10-year U.S. Treasury bonds rose sharply Friday in response to a relatively subdued jobs report, an unwelcome movement for commercial property players as the economy hangs in a precarious balance.

It was the latest swing in the $28.6T market for U.S. Treasury bonds that power federal spending, and it came less than two months after the White House backed off some of its tariffs, at least temporarily, in the face of what President Donald Trump said were “yippy” bond traders pushing up yields. 

Investors are closely watching bond yields, especially for the 10-year Treasury that benchmarks all sorts of commercial real estate debt. Shriveling confidence has not yet derailed a nascent capital markets recovery for the sector, but the higher cost of debt is forcing more owners to make difficult decisions.

“The bond market is basically taking away hope,” Sabal Investment Holdings CEO Pat Jackson said. “Hope is a great panacea.”

Commercial real estate markets have, in many ways, been propped up by hope for the greater part of three years. The notion is exuded in the two most popular taglines for investors, executives and brokers in recent years, as “extend-and-pretend” shared the stage with the “survive until 2025” mantra.

Time, and lenders’ patience, has worn thin, said Jackson, who has $1.7B in assets under management for pension funds, endowments and other institutional capital. 

“We have long held the position that we didn't think interest rates alone would bail anybody out,” Jackson said. “If you’ve gone down that far, you just can't earn your way out of it. It just really makes you have to start getting real about what you are going to do.”

Yields on the 10-year Treasury rose seven basis points Friday and are now more than a full percentage point above their one-year low in mid-September, reflecting shifting investor expectations about U.S. fiscal policy and the medium-term outlook.

“The economy itself is very fragile,” Peachtree Group CEO Greg Friedman said on Bisnow’s First Draft Live podcast Friday. “It's a period of time where you have to be very strategic and thoughtful if you're investing capital — and be very careful.” 

Some buyers today are making acquisitions with underwriting that assumes the 10-year yield will return to 2022 levels, Friedman said, an unlikely outcome in Peachtree Group’s forecast.  

Friedman said those private market buyers are likely overpaying, and he warned that a market-rattling event was looming if not already underway as Trump and billionaire Elon Musk have a public falling out with potential global implications. 

“There's a high risk that there's going to be a black swan event or something that's going to shake up the market,” Friedman said. “It has felt like we're due for one, and this potentially could lead into one, or it could create chaos elsewhere.”

The 10-year reached a 12-month high of 4.8% in mid-May after Moody’s downgraded the U.S. credit rating, and Bloomberg reported around the same time that some traders were positioning their portfolios for rates above 5% in the coming months. 

While tariffs have dominated consumers’ attention, bond traders have been more focused in recent weeks on the federal budget debate and the $2.4T that the current proposal would add to the deficit. An even larger hurdle looms in the late summer when Congress will have to pass legislation to avoid hitting the debt ceiling, Moody's Director of Economic Research Ermengarde Jabir said. 

Congress could eschew the traditional increase to the borrowing limit and instead scrap the debt ceiling altogether as Trump has requested. That would further diminish the dollar’s attractiveness to investors, potentially driving up yields, Jabir said. 

“People aren't completely in the dark about things. It's just a matter of the depth and breadth of the reaction,” she said. “The shock is more or less in sight, it just hasn’t actually happened, but everybody knows it's coming.” 

Still, today’s yields reflect the whole spectrum of investors’ concerns, with the risk premium for all of the current economic uncertainty and potential outcomes already baked in. That means huge swings in yield pricing related to the back-and-forth around tariff, trade or budget policy are unlikely, Jabir said.

“We're dependent on monetary policy actions, but I do think we're at the upper end at the moment, given that we are in the midst of facing all of the uncertainty. We're in the thick of the uncertainty,” she said. 

Against that macroeconomic backdrop, first-quarter commercial real estate transaction volume totaled $92.5B, up 17% from a year earlier, according to a Colliers analysis of MSCI data. In New York, investment sales are up 38% from last year, according to Avison Young. 

U.S. multifamily sales, which accounted for roughly a third of trading volume, were up by dollar volume of 36% year-over-year. Hospitality and industrial assets also posted gains in transaction volume of 27% and 24% respectively. Office was the only segment to see a year-over-year decline. 

Brokerage executives pointed to the uptick in Q1 transactions as a signal that capital markets were coming unlocked. CEOs across brokerage earnings calls told analysts that their clients were trading through the uncertainty and that they expected the pace of trades to accelerate.

“Activity is continuing and our pipelines remain very strong. Our belief is, as long as rates on the capital market side, the 10-year, don’t go above 5%, activity is going to continue,” CBRE Chief Financial Officer Emma Giamartino said on the firm’s April 24 earnings call. 

That scenario is likely, but yields are also unlikely to retreat significantly, Jackson, Jabir and Friedman agreed. That higher-for-longer rate dynamic, coupled with the more than $1.5T wall of debt that is set to mature in 2025, is likely to be the key drivers of trades.

There’s little incentive for owners of performing properties to put them up for sale in the current market, where pricing is opaque and distressed assets are trading at discounts.

The number of mostly empty office towers and apartment buildings coming to market is dwarfed by the growing group of property owners who have an upcoming loan maturity date but no sensible path to refinancing at today’s rates.

“The reality is that the value increase that they were expecting from these low cap rates have just not materialized for owners to be able to say, ‘I'm going to monetize it, pay off the loan, and go my merry way,’” Jackson said. “That's influenced guys like us to invest.”