Strong Economy, Not Inflation, Drives 10-Year Treasury’s Climb

The 10-year Treasury yield rose nearly 70 basis points from its August low to its early-October peak. According to Cushman & Wakefield’s October Market Matters report, much of that climb reflects a stronger economy, as opposed to lasting inflation fears.

That distinction could support commercial real estate returns versus lower rates that might be paired with weaker income growth.

What’s Going On

“One underappreciated driver of higher Treasury yields is the strength of the economy, itself,” Cushman & Wakefield said.

Specifically, stronger consumer spending, coupled with services activity and labor market data, was what led markets to price additional Federal Reserve tightening, with futures assigning “a 40% probability to a (fed funds) rate at least 100 basis points higher by year-end 2027,” Cushman & Wakefield said. The futures match Fed Chair Kevin Warsh’s rhetoric.

The more robust economy has led to improvement across all CRE sectors:

• Industrial: Net absorption hit 76.6 million square feet, the highest since the first quarter of 2023, and asking rent growth accelerated to 4%.
• Multifamily: Vacancy fell to 8.6%, its lowest in three years, and rent growth is the fastest since early 2023.
• Office: Absorption has been positive for five straight quarters, totaling 15.5 million square feet over the past year.
• Retail: Vacancy stood at 5.9%, well below its 7.4% historical average.

With cap rates unlikely to compress, income growth should drive most total returns going forward, the firm said.

Deals Feel the Pressure

Still, rate hikes have been putting downward pressure on activity while prompting retrades, as brokers report widening bid-ask spreads. Cushman & Wakefield said accepted retrades have averaged 3% to 5%, “well below requests of roughly 5%-10%.”

Some sellers are also pushing transactions out or holding off on new deals. At the same time, owners relying on successive bridge loans to extend hold periods have begun evaluating sales, which Cushman & Wakefield said should materialize in 2027.

The firm said that any pricing correction should be milder than during the first rate-hike cycle. Property values are already down approximately 17% as the current basis is 20%-30% below replacement cost.

Where Yields Settle

Cushman & Wakefield expects the 10-year to settle near 4.5%- 5% as energy shocks wane. This rests on the cost of oil; if it remains above $100 per barrel, impacting core inflation, it ‘would push the entire curve higher,’ the report said.

In the meantime, near-term yield movements could track shifts in growth sentiment, which would impact CRE. “Underwriting at current rates is the more prudent baseline, and pullbacks like the one in mid-October may offer windows to lock in financing costs,” Cushman & Wakefield said.

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