As the 10-year Treasury pushes toward 4.75% for the first time since January 2025, investors are asking what it means for U.S. commercial real estate (CRE). Importantly, the reason rates are rising matters as much as the level. What began as an orderly move in real rates and term premium is now giving way to something less benign - rising inflation expectations and a bond market that’s testing the Fed's resolve. A 10-year yield near 5% raises the bar for CRE, but it sharpens our thesis rather than breaks it: net operating income (NOI) growth and selectivity are what will likely separate winners from the rest.

Why are 10-year Treasury rates rising?

The starting point is understanding why longer-term rates are rising. Thinking of the 10-year Treasury as the sum of three building blocks: the neutral rate (R*), inflation expectations, and the term premium, expectations for each have changed significantly since the start of the conflict in Iran. Through mid-July, inflation expectations were well contained, with the rise in Treasury rates driven by a +32bp increase in the 10-year term premia and +27bp increase in implied real short-term rates. However, in the last two weeks of July, inflation expectations began to rise alongside continued increases in real rates and term premia. This accelerated after the July FOMC meeting, signaling growing concern that Fed Chair Kevin Warsh may prove unwilling to act aggressively enough should inflation remain elevated. Effectively, the bond market is testing the Fed's credibility.

What does this mean for headline CRE metrics?

We've long argued that stability in interest rates is the key for CRE—a ~4.5% rate with 3% inflation implies a 1.5% real rate, an accommodative backdrop. But a 10-year approaching 5% is a psychologically and mechanically important line. Average 5-year NOI growth forecasts of ~3.4% across property types are insufficient to defend value against a higher discount rate and rising financing costs. The result is a wider bid/ask spread, slower price discovery, and frozen transaction volumes. Entity- and portfolio-level sales may prove more resilient, however, as stronger-capitalized buyers move to take advantage of any weakness.

CRE is historically a hedge against inflation, but stagflation (rising rates & slowing growth) threw a wrench into the equiation

Maximizing NOI growth becomes even more important

We've also long argued that NOI growth is the key to total returns—it drives both income and capital returns in a world with little cap rate compression. This becomes even more critical as the 10-year approaches 5% and dispersion across property types, markets, and fund vehicles widens. The cohort producing the strongest NOI growth should be able to absorb higher rates—the rest will likely face valuation headwinds. Investors are likely underappreciating the growth profile of the top half, and especially the top quartile, of the NCREIF Property Index (NPI). While the NPI returned a modest 1.29% QoQ in 2Q26, the top quartile has produced greater than 2% quarterly returns (~8% annualized) for four consecutive quarters. Bottom line, we are doubling down on our cycle for selectivity thesis in a higher interest rate environment.

Our longer-term views are not derailed

Our prior analysis showed that U.S. CRE cycles typically span roughly 16 years, progressing through recovery (~2 years), expansion (11–12 years on average), and downturn (~1.5 years) phases. They are supported by both price returns and underappreciated income returns, the latter of which becomes increasingly important in higher interest rate environments. Indeed, U.S.-listed REITs, our leading indicator, continue to signal resilience, with year-to-date total returns of almost +18% (even after giving back -2.4% in the last week of July as rates spiked), and the sector remains firmly in expansion territory. Real estate is the 4th-best of the 11 S&P 500 sectors. We think this is because the sector offers predictable earnings and income-driven returns underpinned by contractual leases.

Investor implications

A 10-year Treasury yield approaching 5% undoubtedly raises the hurdle for CRE, particularly if higher yields increasingly reflect inflation concerns rather than stronger real growth. But the implications are not uniform. In our view, this environment reinforces the themes already shaping the current cycle—NOI growth and selectivity. While higher discount rates may delay price discovery and pressure weaker assets, they are unlikely to derail the broader expansion phase so long as property fundamentals remain intact. The key focus for investors should be less about the direction of rates and more on identifying the property types, markets, and vehicles capable of generating durable cash flow growth.