The commercial real estate recovery is facing another hurdle as the 10-year Treasury yield reaches its highest level since 2002, raising borrowing costs and putting pressure on property values.
The benchmark yield hit 5.3% Wednesday after its biggest quarterly increase since 1994. At Bisnow’s National Commercial Real Estate Finance Event, investors and lenders said the jump is already forcing them to reconsider deals, underwriting and refinancing plans, according to Bisnow.
Higher Rates Are Changing CRE Deals
The 10-year yield was below 4% in February before climbing past 4.5% in May and 5% ahead of the Federal Reserve’s September meeting. Deals that made financial sense weeks ago may no longer work at today’s rates.
Higher yields are also increasing competition for capital as CRE contends with elevated construction costs, inflation and economic uncertainty.
Refinancing Is Getting Harder
Lenders are requiring more equity from some borrowers seeking loan modifications, while private credit firms are taking on more distressed debt.
The higher-rate environment is also putting pressure on owners that have extended loans since the pandemic rather than refinancing or selling. If borrowing costs remain elevated, more borrowers could be forced to refinance, contribute additional equity or sell.
Property Values Could Fall Further
Investors and lenders at the event said property valuations have not fully adjusted to higher financing costs. Lower leverage and more conservative underwriting could put additional pressure on values.
While that could create buying opportunities for well-capitalized investors, the longer rates remain elevated, the greater the risk of forced sales among owners unable to refinance or provide additional equity.
