October 2023 – Unraveling the Latest Treasury Yield Surge
The Investment Environment
The U.S. 10-year Treasury yield has soared to fresh 16-year highs of 4.65% as the yield curve steepens, driven by (1) a realization that the Fed is unlikely to pivot even if growth slows (2) a pickup in term premium. S&P futures are down from their July peak, reflecting the risks of higher macro volatility and heightened uncertainty ahead.
Hopes of a soft landing scenario are dissipating fast with consumer spending coming under pressure. While inflation is easing, it remains stubbornly high.
The drumbeats of those predicting a recession are getting louder. Over the last few weeks, a variety of datapoints have queued up to counter the soft-landing scenario.
The following Fed Funds Rate chart showing how an abrupt rise in rates almost always precedes a recession is representative of the collective data.
The latest ~ 60bp run-up in the 10-year yield has put additional pressures on multifamily valuation and refinancing prospects. Every 25bp increase in rates equates to a roughly 2.5% decrease in available loan proceeds.
This means that, in just one month, owners holding floating rate debt that needs to be refinanced have lost over 5% of the available loan proceeds they would have had access to at the beginning of September. Not an enviable position for many owners that are already struggling with increased operating and cap costs escrows as they face a maturity date.
Last Month in Essential Realty Partners
I was honored to share the stage with esteemed industry leaders at The Family Office Real Estate (FORE) Institute’s annual conference at the University of Denver last month.
Our panel, led by Clinical Professor of Real Estate at The University of Chicago, Dr. Joseph Pagliari, tackled the timely issue of pricing in: Unlocking the Secrets of Real Estate Pricing: Strategy, Trends , and Market Insights. Our session also featured Tom Skinner, PhD, and Ethan Penner. Tom is an economist and Managing Partner of Redbrick LMD, and Ethan is widely known as the pioneer of the CMBS market.
As you can imagine, the issue of pricing has been the headline issue as the real estate market resets. To say our session was “engaging” would be an understatement…as this was an interactive educational session with many of the leading family office investors in the country.
We delved into the science, history, and psychology of how market participants make informed pricing decisions during periods of market dislocation. The collective discussion was empowering as the take-away were decades of industry insights that will help attendees navigate the complexities of real estate pricing confidently.
