How the Latest Rise in Treasury Yields Could Impact CRE Lending

When January’s inflation read proved stickier, and higher, than predicted, the lingering hopes of an early rate cut frizzled away.

Something else happened as well. The yield on the 10-year Treasury jumped from 4.17% to 4.31%. By the end of Wednesday, it had edged back down to 4.27%, but that’s still a long way from the 3.87% that February started with. What does that mean for lending rates/?

Many, probably most, CRE lenders look to baseline rates when setting their own. They start with something like the Secured Overnight Financing Rate (SOFR) or the 10-year Treasury yield, and then add an additional amount — the spread. The 10-year had been coming down as markets looked forward to rate reductions by the Fed. Except, now not so much. Because SOFR and the 10-year are strongly correlated, although they have a timing gap, there’s the potential for eventual upward pressure there.

“The 10-year U.S. Treasury is how lenders primarily price permanent fixed rate loans,” Jeff Klotz, CEO of The Klotz Group of Companies, tells GlobeSt.com. “After a ‘rate-lock’, movement in the index doesn’t affect the rate,” although rates on new loans would be. “SOFR, on the other hand, is how lenders price variable rate debt, which course changes rates each month. For the 10-year — think stabilized properties. For SOFR — think development and transitional properties.”

Even if not directly used by everyone, CRE professionals closely follow the 10-year. “We, along with most professionals in the industry, recognize the significance of the 10-year yield in gauging market sentiment and assessing the viability of certain CRE assets, particularly bridge and transitional properties,” says Michael Lorch, senior vice president and head of commercial real estate at Axos Bank. “Valuable insights into market dynamics and potential shifts in investor behavior are gained by analyzing the trends of the 10-year yield. This allows the industry to adapt and remain agile and responsive to evolving market conditions.”

That doesn’t mean immediate shifts. “In general, CRE lending rates don’t move nearly as quickly as the market and I expect that these rates will stay high, even as SOFR and the 10-year move around because the Fed is messaging that rates will be higher for longer,” says Derrick Barker, CEO and co-founder of Nectar.

A sudden drop wouldn’t necessarily be immediate good news, either. “I think that we would have to see rates meaningfully lower for several months without also seeing weakness in the economy before lenders will reduce their rates meaningfully,” Barker says.

“I think the lending rates are also who’s in the game to be lending now,” adds Lisa Knee, EisnerAmper managing partner and national leader of the Real Estate practice and the National Real Estate Private Equity Group. “When you look at the transaction volume or debt funds, wherever SOFR or Treasury rates are, there’s not transaction volume to support the lending rate. Who’s going to come in and provide the rescue capital? Who’s going to take the delinquencies?”

Plus, if interest rates are already too expensive, a bit higher isn’t going to make a huge difference.