Movements in bond yields are now the dominant force behind commercial real estate pricing—often outweighing the influence of GDP growth or inflation, especially in markets with tight cap rates.

Bond yields as the main driver:

Oxford Economics research shows that changes in yields exert a much stronger pull on valuations than traditional macro factors. For comparison: a 1% decline in GDP typically reduces capital returns by 1.4–2%, and a 1% bump in inflation trims them by 0.3–1.8%. But when bond yields shift, the effect can be several times greater—with elasticities as steep as -9 in volatile markets.

The spread dynamic:

The relationship between Treasury yields and cap rates is pivotal. Rising yields compress spreads, which accelerates pricing corrections—particularly in cities where cap rates are already low. That translates into sharper swings in values for high-cost, yield-thin assets.

Sector-specific reactions:

• Retail: Highly sensitive, with pricing often adjusting within 12 months of a rate move.
• Industrial: More demand-driven, with shocks taking up to five years to fully register.
• Residential: More resilient, reinforcing its role as the defensive sector of CRE.

Why it matters:

This analysis underscores that interest rate risk is no longer just a financing concern. Bond yields have become a signal of coming turbulence in property values. For investors and operators, understanding how shifts in discount rates flow through to pricing is critical in a climate of policy uncertainty.

➥ THE TAKEAWAY

Stop leaning so heavily on GDP or inflation forecasts. If you want to anticipate real estate value swings, keep your eyes on the bond market—where yield movements are becoming the clearest indicator of performance.