The repricing of the bond market will drive a 40% decline in the price of America's office buildings by the end of next year, research firm says
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- The rise in bond yields could spark a price crash in the office sector, according to Capital Economics.
- That's because rising Treasury yields could impact cap rates on office buildings, which lowers prices.
- Office prices could see a 40% peak-to-trough decline by the end of next year, the firm predicted.
Soaring bond yields will have a hand in pushing the price of America's office properties down as much as 40% by the end of next year, according to Capital Economics.
The research firm pointed to the recent surge in Treasury yields, with the yield on the 10-year bond recently hitting 5% for the first time since 2007.
The 10-year yield could ease to around 3.75% in 2024 before surging back up to 4% in 2025, the firm predicted in a note on Tuesday.
That's likely because the neutral real interest rate — the interest rate that neither expands or contracts the economy — is likely higher than it used to be, which means bond yields overall will stay higher in the long run.
Higher bond yields influence higher rates across the economy. In the commercial real estate space, that could mean higher capitalization rates, or the expected return from the income a property generates.
Like bond yields, cap rates are inversely related to property prices, meaning that higher cap rates will push down prices.
"On the back of upward adjustments to our 10-year Treasury yield forecasts, we now expect to see a larger increase in cap rates," Capital Economics' deputy chief property economist Kiran Raichura said. "At the all-property level, this will mean cap rates rise by nearly another 100 bps to peak at around 5.2%, driving total value declines of over 20%," he added of the overall real estate sector.
Office cap rates could jump to 6.5% by the end of 2024, which could push office prices down by at least 40% peak-to-trough, Raichura predicted. That reflects a steeper decline than his previous outlook, where he saw prices crashing 35% by the end of 2025.
Experts have warned of trouble for the commercial real estate sector since the banking turmoil in early 2023, which caused credit conditions to tighten. Banks are less willing to lend on risky, illiquid commercial real estate assets, and property owners that are able to refinance their mortgages are having to do so at much higher interest rates.
The dynamic, experts have warned, could usher in a wave of distress as around $1.5 trillion of debt is set to mature in the sector over the next few years.
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