Multifamily Cap Rates Rise 100 Basis Points as Treasury Yields Surge Nearly 400 Basis Points, Averting Widespread Distress

A significant divergence between commercial real estate (CRE) capitalization rates and U.S. Treasury yields has played a crucial role in preventing a "mass distress scenario" within the multifamily and broader CRE sectors, according to prominent real estate economist Jay Parsons. Historically, cap rates and treasury yields have shown a strong correlation, with movements in one typically mirrored by the other. However, recent market trends indicate a notable breakdown in this traditional relationship.

Parsons, a recognized expert in rental housing economics, highlighted this shift on social media, stating, > "Cap rates are correlated with treasury yields" views haven't aged well, and that's a big reason why multifamily (and most CRE) has avoided a mass distress scenario. Sure, there's a broad relationship, but cap rates are up ~100 bps from low point, treasuries up nearly 400 bps.

This observation underscores a critical disconnect in the market. While a rise in treasury yields, representing the risk-free rate, would typically necessitate a proportional increase in cap rates (reflecting higher investor return requirements and lower property values), this has not fully materialized. Data from Freddie Mac's 2024 Multifamily Outlook supports this, noting that while multifamily cap rates increased by approximately 60 basis points since the second quarter of 2022, 10-year Treasury rates rose at twice that pace during the same period. This has resulted in a tightening of the cap rate spread, falling to 116 basis points from a historical average of 310 basis points.

The limited expansion of cap rates relative to soaring treasury yields has effectively insulated many CRE assets, particularly multifamily properties, from severe devaluation. Experts suggest that commercial real estate's role as an inflation hedge, coupled with robust underlying fundamentals such as strong demand and low delinquency rates, has contributed to this resilience. For instance, the single-family rental (SFR) sector saw average cap rates rise by 26 basis points to 6.8% in Q2 2024, yet the risk premium over 10-year Treasury yields remained relatively flat at 231 basis points, indicating continued investor confidence despite rising borrowing costs.

This market dynamic suggests that while financing costs have increased significantly, property values have not depreciated as sharply as might be expected under traditional models. The multifamily sector, in particular, continues to be viewed favorably by investors, with recent CBRE surveys indicating it has surpassed industrial as the most optimistic sector for investment performance. This ongoing stability, despite volatile interest rates, highlights the sector's robust position and its ability to absorb economic pressures without widespread distress.