Capital Watch: Increased Investment Expected Despite Bond Market Volatility

Surprisingly, short- and long-term interest rates, which have a profound effect on commercial real estate investment activity, have not been moving in tandem like they usually do.

The 10-year Treasury yield has increased since the Fed began its latest round of short-term rate cuts in September 2024. By early January, the 10-year yield had risen by more than 100 basis points (bps) to a peak of 4.78% even though the Fed had cut short-term rates by 100 bps. The long-term Treasury rate has since fallen back to around 4.3% as of March 24, which is still 70 bps higher than it was last September.

Fed interest rate cuts that would normally fuel a bond rally did not initially do so this time around. This was because investors expected strong economic growth and were concerned about large budget deficits and government policy uncertainty.

Figure 1: Change in 10-Year Treasury Yield Following September 2024 Fed Rate Cut

There usually are implications for real estate asset values as long-term yields rise. However, since there has been repricing of approximately 20% across commercial property types—substantially more in office—over the past three years, we don’t expect any significant declines in values unless the 10-year yield climbs to the upper 4% range or higher.

We expect that moderating inflation and more clarity on government policy will keep the 10-year yield closer to 4% as 2025 progresses. This expectation has been bolstered by the recent bond market rally, driven in part by shifting market sentiment due to Treasury Secretary Bessent’s intense public focus on lowering the 10-year benchmark yield. Lower yields, combined with an improving lending environment, should allow the real estate investment market to continue recovering.

CBRE expects investment activity to pick up this year with some cap rate compression, particularly in the second half. However, should bonds continue to rally and the macroeconomic environment remain favorable, investment activity could pick up sooner and cap rates could compress modestly more than currently expected. We believe the extent of the compression will be limited because rates will not return to pre-pandemic levels.

What do investors say?

Nearly 70% of respondents to CBRE’s 2025 U.S. Investor Intentions Survey, conducted after the 10-year yield spiked following the 2024 U.S. election, indicated that elevated and volatile long-term bond yields were the top challenge for investment in 2025. Overall, the results of the survey were generally positive, with 70% of respondents expecting increased purchasing activity. This was backed by additional capital allocations (around 50% of investors), motivated by more favorable pricing.

Figure 2: Reasons for Increased Allocations to Commercial Real Estate

Implications for Real Estate Investors

With the expectation that long-term bond yields will move lower and that investor sentiment will improve as the year goes on, we believe commercial real estate pricing will remain largely stable.

Figure 3 shows the relationship between cap rates and subsequent five-year returns. We think 2025 is an attractive time to invest in commercial real estate, with CBRE Econometric Advisors forecasting an average 9.3% annual return over the next five years (2025 to 2029).

Figure 3: Relationship Between Cap Rates & Subsequent 5-Year Annual Total Returns

While we believe the current cycle will present opportunities across commercial property sectors and markets, asset selection will be key as investors focus on realizing NOI growth. This is corroborated by the findings of our 2025 Investor Intentions Survey that core-plus and value-add strategies will dominate investment activity this year.

Although volatility and uncertainty remain near-term challenges, we think 2025 will present opportunities for commercial real estate investors.