The 10-Year Treasury - Navigating Uncertainty

The 10-year Treasury yield—the risk-free rate on a 10-year government bond—has been fluctuating lately, creating uncertainty for investors and borrowers. The 10-year Treasury yield plays a critical role in setting rates on long-term loans, including mortgages for commercial real estate, as it acts as a benchmark for lenders to determine what rates they can offer borrowers.

Impacts on Short-Term Financing

Shorter-term loans, like construction loans or temporary financing (known as bridge loans), are significantly impacted by changes in shorter Treasury bonds. As these rates change, so do the costs associated with securing funding for developments or other projects, making it important for developers to stay informed.

Bridge loans cover short-term financing but become more expensive as interest rates rise

Upcoming Loan Maturities

Over $300 billion in commercial real estate loans will reach maturity and need to be paid off or refinanced in 2024 and 2025 (data from CRED iQ). Many of these loans were taken out a decade ago when interest rates were significantly lower, hovering around 2.54% (data from Multpl).

Refinancing Options

As loans mature, borrowers typically have two options: find a way to pay off the loans or refinance them at higher interest rates, which could place them in even greater financial trouble. The rising 10-year Treasury means that long-term loans will come at a higher cost, making it more expensive to extend the loan or renew financing under favorable terms.

Federal Reserve Today

The Fed has been raising interest rates in an attempt to control inflation, which directly contributes to the increase in the 10-year Treasury yield. Understanding the Fed’s moves is critical for stakeholders in the CRE market, but predicting it or how the 10-year yield will act is not an easy task.

The Delayed Impact on CRE

It’s important to note that the commercial real estate market usually experiences a delayed reaction to shifts in the economic world. Changes in interest rates and economic conditions can take time to affect property values and investment strategies. 

San Diego Market Insights

The San Diego market is seeing strong demand for industrial and multifamily properties, driven by population growth and a robust job market. San Diego’s unemployment rate currently stands at 5%, which is lower than the long-term average of 5.72% (data from YCharts - San Diego). 

While the higher interest rates have slowed down buyer activity for single-family homes, demand is still high due to limited inventory. The San Diego metro area has only a 1.5-month supply of homes for sale (data from Home Buyer Institute). 

Chart from AXIOS San Diego, Data from RedFin

In the multifamily sector, demand is strong, with vacancy rates at 4.2%. Affordable Class B and C units are particularly strong, with vacancy rates as low as 2.4% (data from Moody’s CRE). Higher-end Class A properties are experiencing the other end of this with a vacancy rate of 6.1%. With more people choosing to rent instead of buy, demand for multifamily properties will likely remain strong.

Source

• Globest.com. "Now What's Happening With the 10-Year Treasury?" Link to Article