How Cap Rates and 10-Year Treasury Yields Impact Multifamily Investment Decisions
When evaluating a multifamily investment, one of the most important financial metrics to consider is the capitalization rate (cap rate). However, cap rates don’t exist in a vacuum. They are closely tied to broader economic conditions—especially the 10-year U.S. Treasury yield, which serves as a benchmark for risk-free returns. Understanding the relationship between cap rates and Treasury yields can help investors make informed decisions about when and where to deploy capital.
What Are Cap Rates and Why Do They Matter?
Cap rates represent the expected annual return on a real estate investment, calculated as:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
In general:
- Higher cap rates indicate higher potential returns but may also reflect increased risk or weaker demand.
- Lower cap rates suggest stronger demand and lower perceived risk, often seen in premium markets or with high-quality assets.
For multifamily investors, cap rates help assess whether an investment aligns with return expectations and risk tolerance.
The 10-Year Treasury Yield as a Benchmark
The 10-year U.S. Treasury note is widely considered a risk-free investment because it is backed by the federal government. Its yield reflects broader economic conditions, including inflation expectations and Federal Reserve policies.
When Treasury yields rise, they provide a more attractive alternative to real estate, which can put upward pressure on cap rates. Conversely, when Treasury yields fall, investors may seek higher returns in real estate, often driving cap rates lower.
Cap Rate Spreads: The Key Indicator
One of the most critical metrics for real estate investors is the spread between cap rates and the 10-year Treasury yield.
Cap Rate Spread = Market Cap Rate – 10-Year Treasury Yield
Historically, this spread has ranged between 250–500 basis points (2.5%–5%), depending on asset class, location, and market conditions.
- Narrowing spreads (low cap rates relative to Treasury yields) suggest a more competitive, lower-yielding environment for real estate.
- Widening spreads indicate real estate is offering a more attractive risk-adjusted return compared to bonds.
For example, if a multifamily cap rate in a major market is 4.50% while the 10-year Treasury yield is 4.00%, the spread is 0.50%. In this scenario, investors may seek higher yields elsewhere, which could lead to softening demand and upward pressure on cap rates.
Current Market Trends and Future Outlook
Over the past few years, we have seen significant fluctuations in both cap rates and Treasury yields:
- In 2020-2021, record-low interest rates pushed the 10-year Treasury yield to historic lows (below 1%), leading to a compression in cap rates as investors flooded into real estate.
- In 2022-2023, rising interest rates drove Treasury yields above 4%, creating upward pressure on cap rates and making financing more expensive.
- In 2025 and beyond, cap rate movements will continue to depend on Federal Reserve policy, inflation trends, and investor sentiment.
What This Means for Multifamily Investors
For investors considering a multifamily acquisition, monitoring cap rate spreads is crucial:
- If Treasury yields rise further, expect cap rates to adjust accordingly.
- If yields stabilize or decline, cap rates may follow suit, particularly in strong rental markets.
- Investors should evaluate each deal not just on its cap rate but also in the context of financing costs and broader economic trends.
Final Thoughts
Cap rates and 10-year Treasury yields are deeply interconnected, influencing the risk and return profile of multifamily investments. By understanding how these factors interact, investors can make more strategic decisions—whether that means buying, selling, or holding in the current market environment.
Kynan Pang, CCIM
RB-23513
808.225.8776