Soaring 10-year Treasury yields have thrown ice-cold water on CRE’s typically unrelenting optimism.

The key economic benchmark hit 5.3% on Wednesday afternoon, reaching its highest level since 2002 at the end of its biggest quarterly increase since 1994. As the 10-year climbed, some of the industry’s largest players — already battered by high construction costs, inflation and geopolitical upheaval — watched the historic upswing from Bisnow’s National Commercial Real Estate Finance Event and agreed that times were about to get a lot tougher.

“The volatility is the worst thing for all of us,” AEW Capital Management Chief Operating Officer Lauren O’Neil said onstage. “When you have rates jump 75 basis points in a matter of 30 days, that just puts a complete chill out on the market.”

The rapid run-up has forced the real estate industry to realize that deals that worked a month ago may not pencil out tomorrow. As lenders pump the brakes, a stalemate risks jeopardizing the recovery that investors have long been betting on.

“For a long time, legacy owners have had the perspective that things have moved against me, and I'm waiting for them to move back in my favor before I do anything,” Dansker Capital Group CEO Andrew Dansker said. “That perspective is changing, and I think that is going to cause owners to make different choices and make their lenders make different choices.”

The investors and lenders at the event said real estate values are likely to come down because of the higher rates, creating buying opportunities.

“It will be painful for some legacy operators who got wiped out,” Dansker added. “But it will ultimately be positive for everyone in terms of resetting basis.”

The 10-year yield dipped below 4% on Feb. 27, one day before the U.S. launched its attack on Iran, and it has been on a growth path ever since. It closed that day at 3.96% — its low for the year — and has not fallen below 4% since then.

Yields first cleared 4.5% in May. Right before the Federal Open Market Committee’s September meeting, the benchmark pushed past 5%, considered a key psychological threshold.

“Economists have this great concept called ceteris paribus. It means all else being equal,” KeyBank Real Estate Capital Senior Banker Joshua Mayers said. “The trouble is, the real world doesn't work like that. We're running multiple weird, crazy experiments all over the place right now, and it's really challenging.”

Rising oil prices and an ongoing trade war have fueled inflation fears, prompting the Federal Reserve to raise interest rates. At the same time, the economy and labor market have remained surprisingly resilient.

Strong corporate growth, particularly among artificial intelligence companies, has kept stocks attractive to investors even as Treasury yields climb. Meanwhile, the national debt surpassed a record $40T in August, adding to concerns about the government’s enormous borrowing needs and putting further pressure on long-term Treasury yields.

The world is an investor’s oyster, but for CRE, that means the competition for capital is getting tougher, borrowing costs are up, and property values are feeling the squeeze.

“I just think we’ve been the bad word, the bad sector for a long time, and any uncertainty makes it a lot harder to raise capital,” said Nailah Flake, a managing director at Brookfield who leads its real estate credit arm.

Appraisals have not yet caught up to the broader economic changes, panelists said during Bisnow’s event, held at the Times Square Marriott Marquis. That may be about to change.

“We're going to see leverage come down by this, and, frankly, I think that's the Fed's intent,” Mayers said. “All these lenders are going to have to get in line and start to stress the underwriting rates, in order to make sure that their leverage isn't too out of whack for the ultimate valuation and the ultimate takeout of the loan whenever it comes due.”

CRE has played the extend-and-pretend game year after year since the pandemic shocked the market. Now, with hopes for a quick decline in borrowing costs fading, lenders' patience has run out.

“No more kicking the can down the road,” George Smith Partners President Justin Piasecki said. “You have to refinance or sell, and at today’s price, not yesterday’s price.”

Banks have increasingly required borrowers to put more equity into troubled loans in exchange for modifications, while the booming private credit sector has stepped in to take over distressed debt — and properties.

When Rialto Capital and Blackstone took over a portion of Signature Bank’s portfolio, the lenders expected borrowers to refinance at lower interest rates. Instead, borrowers sought extensions, Rialto Head of Special Situations Joe Bachkosky said. 

The threat of refinancing in the new rate environment is now lighting a fire under borrowers. 

“We started writing them letters saying, ‘Just you know, in 120 days, rates are going to go up,’” Bachkosky said. “Then people started paying off their loans.”

The surge in yields puts even more power in the hands of well-capitalized private credit and debt funds, and lenders plan to use it to their advantage. But even private credit firms are likely to build in more protections as the specter of distress rises again.

“I'm excited because I can pick my spots, but I think private credit needs to be really mindful of where we're pushing the envelope,” Flake said. “Structures that I think we saw disappear in the last few months will come back — interest reserves, equity funding guarantees, things that people were dropping in order to win transactions. I think we'll start to see people be more disciplined.”

For those who don’t have the required equity, pain may be rearing its head on the horizon. 

“There hasn’t been much forced selling,” Bachkosky said. “With the rate move up, the longer it stays here or continues to go up, the more likelihood that the day of reckoning comes.”