Founder's Note
The ten-year Treasury yield touched 5.33% on Thursday, its highest level since 2002, and closed the week at 5.28%. A day later the September jobs report showed 29,000 new jobs, about a third of what economists expected, with July revised to a loss of 10,000. The yield ticked higher anyway. Borrowing costs are at a two-decade high, and the economy that has to carry them is slowing.
Most private real estate returns come in two parts: the cash a property pays while you own it, and the price someone pays for it at the end. That second part is a forecast. It depends on what a buyer will pay years from now, and buyers price buildings off the same Treasury yield that just reached a 24-year high. When rates rise, the far-off part of a return is the part that shrinks. Cash that has already been paid to you cannot be repriced.
My read: when I open a deal now, I ask what share of the projected return shows up as income during the hold and what share waits on the sale. Neither is wrong. A development has to wait, and it should pay more for the wait. But the two are different bets, and a week like this one shows which is more exposed.
This Week in Markets
1. Hiring nearly stopped in September, and July turned negative
Employers added 29,000 jobs in September, against a forecast of 84,000, and the unemployment rate rose to 4.2% from 4.1%. July, first reported as a gain of 21,000, is now a loss of 10,000. Traders put the odds of a Federal Reserve rate increase at its October 27 and 28 meeting at 17%, down from about 36% a week earlier, according to CME's FedWatch tool.
Why it matters: Slower hiring means slower rent growth, and it is arriving without the lower rates that usually soften it. A plan that needs both rising rents and cheaper debt is asking for two things the data is not offering.
2. The ten-year Treasury passed its 2007 peak, and mortgages followed
The ten-year yield reached 5.33% on October 1, above its 2007 peak and the highest since 2002, before closing the week at 5.28%. Analysts point to persistent inflation and heavy government and corporate borrowing. Freddie Mac's average 30-year mortgage rate jumped to 7.28% from 7.03% in a single week, the highest since 2023.
Why it matters: The ten-year is the yardstick every property is measured against. A higher yardstick lowers what a buyer will pay for the same income, and it raises the cost of every loan that has to be refinanced along the way.
3. Self-storage rents are still falling, but occupancy has steadied
Advertised self-storage rates fell 1.9% from a year earlier in August, a steeper drop than July's 1.6%, according to Yardi Matrix's September report. Yardi says occupancy appears to have stabilized and the construction pipeline keeps shrinking, though the gap between what existing customers pay and the advertised rate is historically wide.
Why it matters: A stabilized facility earns most of its income from customers already inside, at rates above the advertised one. That cushions income today, and it is also the risk: if tenants leave, their replacements pay less.
The Take
Two deals can promise the same return and be nothing alike. One pays you a little every month and hands back your capital at the end. The other pays nothing for five years and then, if the plan works, pays everything at once. On a spreadsheet they can show the identical number. In a week when the benchmark for every interest rate hit a 24-year high and hiring slowed to a crawl, they are not the same investment, because one of them is still waiting to find out what it is worth.
Bond investors have a word for this: duration. It measures how far in the future your money comes back, and the further out it is, the harder a rise in rates hits its value today. Real estate has duration too. A return that comes mostly at the exit depends on a price set years from now, by a buyer using whatever rates exist then. A return that comes mostly as distributions depends on tenants paying rent this month. Three questions sort one from the other before you commit.
One. Ask how the projected return splits between income and sale. Any sponsor can tell you how much of the total is expected as distributions while you own it and how much comes from the exit. The larger the exit's share, the more your result depends on the price of money on a day nobody can name.
Two. Ask where the distributions come from. Income paid out of rent that tenants are already paying is one thing. Income that depends on leasing empty space, or that is paid from money raised from investors, is another. A stabilized property with an operating history can show you the first.
Three. Ask what debt does to the cash. With the ten-year above 5%, a commercial loan often costs more than the building earns, so each extra dollar of debt takes income away instead of adding it. Lower leverage leaves more of the rent for the people who own the property.
The uncomfortable half deserves saying too. Income first is not the same as safe. A projected 6% yield is less than one point above a ten-year Treasury that pays 5.28%, is backed by the government and can be sold any day. Advertised storage rents fell 1.9% over the past year, and a facility's income holds only as long as its customers stay. Read the offering documents, not the summary.
But the principle outlasts any one deal. A Treasury's payment is fixed for ten years. A property's income can rise with rents, and it can fall. That is the trade on offer this week: a guaranteed 5.28%, or a projected yield from real buildings with room to grow and room to disappoint. Whichever you choose, know which part of the return you are being paid now and which part you are being asked to wait for. Target returns remain targets, projected yields are not guaranteed, and past performance does not predict future results. Before you ask how much a deal pays, ask when.