- The 10-year Treasury yield, currently at 4.5%, could rise to 5% or higher in 2025, driven by fiscal expansion, tax cuts, and economic growth.
- Higher yields would raise CRE mortgage rates, increasing costs for refinancing, bridge, and construction loans.
- Inflation risks and reduced foreign interest in US Treasurys are contributing to upward yield pressures, though Fed interventions could provide some relief.
The commercial real estate industry, already facing significant challenges, may face another hurdle in 2025: rising Treasury yields.
By The Numbers
According to Arif Husain, Chief Investment Officer of Fixed-Income at T. Rowe Price, the 10-year Treasury yield could hit 5% in early 2025, with a 6% yield not out of the question.
GlobeSt reported that this increase would push CRE mortgage rates higher, complicating refinancing and new loan opportunities for developers and investors.
Following The Curve
As Treasury yields rise, they elevate the benchmark for risk-free returns, which in turn pressures lenders to increase rates on CRE loans. A continued climb would impact:
- Refinancing Costs: Properties needing new loans could face higher interest rates, squeezing cash flows.
- Bridge and Construction Loans: Rising rates could deter speculative projects, further slowing recovery in struggling sectors like office and hospitality.
- Transaction Volume: Increased borrowing costs might dampen investor appetite, stalling deals.
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Why Yields Are Rising
Husain identifies four major factors causing Treasury yields to keep going up:
- Expanding Fiscal Budget: A federal budget deficit nearing 7% of GDP, combined with anticipated tax cuts from the incoming Trump administration, will likely lead to higher Treasury issuance. And more debt issuance could lower bond prices and push yields higher.
- Declining Foreign Demand: Major buyers like China and Japan have been reducing their Treasury holdings, lowering demand and further pressuring yields upward.
- Economic Strength: The US economy shows few signs of recession, keeping demand for capital robust.
- Inflation Risks: Tax cuts and potential tariffs could inject excess capital and raise consumer prices, stoking inflation and putting additional pressure on yields.
Potential Counterbalances
Two factors could help temper yield increases:
- Fed Regulation and Policy Adjustments: Recent banking regulation guidance may boost demand for Treasurys, potentially stabilizing prices and yields.
- Fed Independence and Intervention: Rumors about Fed interventions, including a pause in quantitative tightening or renewed bond purchases, could also control rising yields.
What’s Next?
Even as the Federal Reserve has signaled a slower pace of rate cuts in 2025, stabilizing inflation and a clearer fiscal picture could ease long-term pressures on the market.
However, the road ahead will be uneven, with higher Treasury yields likely pushing CRE mortgage rates upward.
Asset classes such as multifamily and self-storage, which have shown resilience, may better weather this shift, while speculative sectors like office and hospitality will face extended challenges.
