BearishInactive · since Nov 9Real EstateREIT - Office · opened Oct 5

High long-term yields will cut real estate companies' profits as old debt is refinanced, even if the Fed pauses

4.1Early

10 sources · last evidence 22 days ago

Trade thesis

Long-term borrowing costs keep climbing, with Treasury yields at fresh 24-year highs, the 30-year back at its 2002 high as crude topped $100, and hot inflation lifting Fed rate-hike bets. Office landlords such as Vornado have fallen, doing worse than a slightly lower S&P 500. Nothing in the last month argued otherwise, and the main risk is the 10-year yield closing below 4.75% before October 20.

Updated Oct 15

What's new?

Oct 14ForHotter-than-expected inflation sank Treasuries and raised bets on a Fed hike later this month, pushing long-term borrowing costs higher.

Oct 13ForPIMCO's Ivascyn said Treasury yields have yet to peak and the Fed may tighten further, pointing to costlier property refinancing ahead.

Oct 7ForA global bond sell-off lifted the 30-year Treasury yield back to its 2002 high as crude topped $100, deepening refinancing costs.

Who gets hurt

REIT - Office

Names to watch, by industry

REIT - Office

BXPVNO

How it started · Oct 5

The reasoning of the connection that opened this thesis. It is not updated.

History

The closest parallel is October 2023. The 10-year yield briefly touched 5%, and real estate investment trusts (REITs) sold off sharply even as the Fed signaled a pause. Office REITs fell the most, while the broader stock market fell by much less. A Fed pause does not automatically pull long-term yields down, and property cash flows are valued off long-term yields, not the Fed's own rate.

The bull case

The 10-year yield could fall sharply after the soft jobs data. That is plausible if later inflation reports also come in weak. Then the real estate trusts with the most debt coming due would gain the most from falling long-term rates, instead of being hurt the most. In that case, the most beaten-down commercial and residential REITs would do significantly better than the market.

Evidence · 10 sources · newest first

10 for · 0 against

Oct 22ForNews | Rising rates derail CBRE's real estate deal momentumCostarNews story Oct 14ForTreasuries Slump as Hot Inflation Lifts Fed Rate-Hike Bets

Comments

No comments yet.

Reasoning from the connection this reasoning comes fromMore theses in Real Estate

How does it connect?

1
What happened
Soft September payrolls lower the odds of another Fed rate hike. Stocks and bonds rally as investors drop their hedges against another hike.
2
What it forces
Even with the Fed signaling a pause, the 10-year yield stays at 5.28%. That keeps mortgage and commercial property refinancing rates painful for real estate trusts (REITs) rolling over debt that comes due soon.
3
Who feels it
Over the next one to two quarters, REITs refinance floating-rate or maturing fixed-rate debt at current long-term rates, and their net operating income shrinks. That pushes them toward dividend cuts or share sales that dilute owners. These should surface in third-quarter earnings calls and fourth-quarter guidance, a risk the relief rally does not yet reflect.