Investing.com – Rising U.S. bond yields could lead to a 40% drop in U.S. commercial property prices by the end of next year, according to Capital Economics.
The consultancy points to the recent increase in yields on US Treasury bonds, with the 10-year rate recently reaching 5% for the first time since 2007.
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Capital Economics predicts the 10-year yield could fall to around 3.75% in 2024 before rising again to 4% in 2025.
This is likely due to the fact that the neutral real interest rate – which neither speeds up nor slows down the economy – is likely higher now than it was before, meaning bond yields in general will remain higher over the long term.
The higher returns on these securities cause an increase in interest rates throughout the economy. In commercial real estate, this can result in higher capitalization rates, i.e. the expected return on revenue generated by a property.
Just like bond yields, cap rates are inversely related to property prices, meaning higher cap rates result in lower prices.
“Due to the upward adjustments to our US 10-year bond yield forecasts, we now expect an even larger increase in cap rates,” said Kiran Raichura, deputy chief economist at real estate specialist Capital Economics. “Considering the real estate sector as a whole, this means cap rates will rise by almost an additional 100 basis points, reaching around 5.2%, leading to total value declines of over 20%,” he added of the sector. real estate as a whole.
Capitalization rates for offices could reach 6.5% by the end of 2024, which could result in a drop in office prices of at least 40% from peak to peak, Mr Raichura predicted. This is a larger drop than he had previously predicted, which was a 35% drop by the end of 2025.
Experts have been warning about challenges in the commercial real estate sector since banking turmoil in early 2023 led to a tightening of credit conditions. Banks are less willing to lend on risky and illiquid commercial real estate assets, and homeowners who can refinance their mortgage loans have to do so at much higher interest rates.
This dynamic, according to experts, could lead to a wave of defaults, as around US$1.5 trillion in debt is expected to mature in the sector in the coming years.
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