Rising Rates: What It Means for Real Estate Investors

Quick Take: The 10-year Treasury yield has climbed sharply over the past three months. This matters because rising rates put near-term pressure on property values through higher cap rates, even as the same forces that create that pressure are also setting up the operating recovery that helps offset it over time. This is the first in a series of articles designed to help investors understand what’s happening in the market and how we’re navigating it.

The 10-Year Treasury Rises to 19-Year Highs

The 10-year Treasury yield climbed to its highest level since 2007, reaching as high as 5.23% on September 25, 2026, 86 basis points higher than where it stood on June 25. The rise has been driven in part by a resurgence in inflation tied to rising energy prices and tariff-related cost pressure, compounded by the sheer scale of government debt the market has to absorb. 

Total federal debt now stands above $40 trillion, with roughly a quarter of it, about $10 trillion, maturing and needing to be refinanced this year alone. That supply hit thinning demand in late September: a $70 billion five-year Treasury note auction on September 23 drew the weakest demand since 2018, with foreign and institutional participation falling to 54.3%, its lowest share since March 2020. When the buyer base thins, yields have to adjust upward to attract the capital still willing to show up. 

Additionally, the Federal Reserve raised its benchmark rate range on September 16 to 3.75%–4.00%, its first hike since 2023. While the Fed doesn’t control the long end of the curve, it can influence it through a demonstrated commitment to bringing inflation back to target. A single 25-basis-point hike of the federal funds rate doesn’t resolve that on its own, and we believe that further tightening may be needed if the Fed wants to both slow inflation and bring down the yields of long-term bonds.   

Higher long-term rates matter to real estate investors because the 10-year Treasury is the benchmark underlying the discount rate used to value future cash flows, and it has a direct impact on the cost of borrowing. When rates rise, property values generally fall as cap rates rise and the cost of debt consumes more of a property’s cash flow. In our view, one of the clearest ways for investors to be adequately compensated in this environment is to buy at lower prices that produce higher returns.  

The transmission isn’t instant or one-for-one. Cap rates have historically moved by only a fraction of a given Treasury move, and multifamily income can grow over time in a way a bond’s fixed coupon cannot, giving real estate a path to recover value that fixed income lacks. When cap rates and borrowing costs rise, buyers adjust their models immediately and prices may ultimately follow if owners realize that their properties aren’t worth what they were just three months ago and sell into this new pricing environment. 

How Treasuries Move Cap Rates 

At the end of 2021, the 10-year Treasury hovered around 1.5%, and Class A multifamily cap rates sat at all-time lows near 3.5%. Cap rates rose steadily over the next several years, climbing from 3.5% to just below 5% by the first half of 2026. Over that period, the 10-year Treasury rose roughly 300 basis points, while cap rates rose only 125 to 150 basis points. The two moved in the same direction, but cap rates moved less than half as much. For much of this period, cap rates traded in a range above the 10-year Treasury, giving investors a modest but positive risk premium for owning real estate over government debt. 

What changed recently is how directly Treasury moves are likely to reach cap rates. The 10-year rose from roughly 4.37% in late June to as high as 5.23% by late September, a sharp move over a shorter window, and it now sits above the just-under-5% cap rates on Class A multifamily. With real estate no longer offering a premium over government debt, there’s little cushion left to absorb further increases, so cap rates are likely to respond more strongly than the historical pattern suggests.   

The market ultimately decides where cap rates and values land, and a move of this size and speed has very likely already weighed on real estate values, even if it hasn’t yet shown up in transaction data. Private real estate is valued through periodic appraisals and infrequent sales, not daily trading, so it typically takes several months for a rise in rates to show up in closed and recorded deals. Some managers will mark down their investments quickly, while others wait until completed sales confirm the new pricing.   

Absent fresh transaction data, the public REIT market offers a useful real-time read. Shares of Mid-America Apartment Communities (MAA), one of the largest publicly traded multifamily REITs, have fallen from roughly $140 on July 1 to around $118 as of September 25, a decline of nearly 16% during the sharpest leg of the Treasury’s climb. Company-specific factors have played a part, but rates are a clear driver: Truist cited higher interest rates directly when it cut its price target on the stock in mid-September. 

Pricing real estate is far more complicated than tracking Treasury yields and plugging a cap rate into a model. Buyers underwrite a property against several benchmarks at once and triangulate value from those inputs. Replacement cost, or what it would take to build the same asset today, puts a practical floor under where newer, well-located properties trade, regardless of where the 10-year Treasury sits on a given day. Rising rents work in the same direction, and may allow buyers to accept lower cap rates on assets where income is growing, even in a higher-rate environment. Both forces may help limit how far cap rates can rise, even as Treasury yields climb. 

An Operational Recovery Is Taking Shape 

We believe the supply side of the equation is turning in investors’ favor. The wave of units delivered from 2021–22 developments is working its way through the market, and new construction starts and permits have declined sharply as higher rates and elevated costs make new projects harder to underwrite. Fewer projects breaking ground today means less competition for existing owners in 2027 and 2028, when those units would otherwise have delivered. As that overhang eases, concessions are declining and absorption remains strong, and rent growth, while slower to emerge than expected, is beginning to stabilize. 

Demand fundamentals remain a tailwind as well. The gap between the cost of renting and the cost of owning a home is still extraordinarily wide. Even as home prices adjust unevenly across markets, owning remains far more expensive than renting in most of the country. That affordability gap continues to keep renters in the market rather than pulling them toward homeownership, supporting occupancy even as new supply gets absorbed. At the same time, wages have risen faster than rents over the past three years, so renters are better able to absorb future rent increases. On the operating side, controllable expenses are stabilizing, with payroll and materials costs moderating. As concessions taper and occupancy mostly holds firm, operators may be positioned to capture more upside if leasing conditions continue to improve. 

None of this is showing up yet as a rebound in rent growth; it is showing up as a market that is quietly healing: fewer units competing for renters, more renters who can’t afford to buy, and operators managing costs tightly while they wait for pricing power to return. This latest move in values has less to do with the underlying health of the multifamily market than with a fundamental shift in capital markets. 

The gap between higher Treasury rates and transaction prices that haven’t yet adjusted likely won’t hold indefinitely. Owners and managers who have spent the past several years waiting for conditions to improve are running out of runway, and some may be forced to sell into this environment. Multifamily real estate is closing in on five years since the onset of one of the most difficult periods in the asset class’s modern history, and capitulation among the most stretched owners may not be far off. That kind of forced selling typically puts near-term pressure on pricing, but lower prices arriving at the same time fundamentals are improving is, historically, one of the better setups for long-term returns. It is the combination, not either force alone, that tends to matter most for investors underwriting a multi-year hold. 

How We Are Navigating This 

Rate-driven repricing is only theoretical until it touches an actual portfolio, and it eventually touches every real estate portfolio in some way, including ours. Our two main funds, our private credit offering* and IncomePlus Fund, have their net asset value marked daily and monthly, respectively, whether or not a comparable transaction has closed nearby to confirm the number. Absent fresh transaction data, we rely on the same signals discussed throughout this piece, including public market pricing, replacement cost and cap rate movement relative to Treasury yields, to keep our marks current rather than waiting for deal comps that may not arrive for months.

That discipline exists to keep the fund fair for everyone in it. New investors buy in at whatever price the fund is currently marked, and existing investors who redeem exit at the price the fund is currently marked. Marking accurately, even when it means recognizing a decline before a transaction proves it, keeps entries and exits fair on both sides, and it avoids a problem we’ve seen elsewhere in this industry: portfolios carrying legacy assets marked at yesterday’s prices.

The same discipline shapes how we underwrite new deals. As borrowing costs and Treasury yields rise, so do the returns we require, and deals we were comfortable with four months ago are being re-run through today’s numbers. We have adjusted our underwriting models and kicked out several deals in our pipeline that no longer clear today’s hurdle; others are being renegotiated at lower prices.

Some Investments Will Be Impacted More Than Others 

Every manager and investor is having to digest the impact of the latest move in rates, and not all investments are impacted the same. Credit funds will generally fare better than equity funds, and more highly leveraged, lower-quality assets will be impacted the most. Our private credit offering is structured around senior lending positions with comparatively less leverage and may be less directly exposed to asset-level cap rate movement. However, our private credit offering is not immune to market conditions and the fund’s returns may be affected by borrower defaults, declines in the value of underlying collateral and changes in interest rates and credit spreads. Our IncomePlus Fund is a diversified fund with a mix of common and preferred equity and ground-up development, and we expect it will be impacted more than the credit fund but less than our equity investments. Some of our other equity strategies like Growth Fund IV carry more leverage and more direct exposure to development and are likely to feel the adjustment in values more. This is consistent with the basic principle that leverage amplifies both the upside and the downside of a move in the underlying price of an asset.

The math behind that pattern is straightforward. Consider a property generating $5 million of NOI, valued at $100 million at a 5.0% cap rate. If the cap rate rises to 5.5%, the same NOI supports a value of about $90.9 million, a decline of roughly 9%. Leverage magnifies that change for equity investors, because the loan balance doesn’t shrink when the property’s value does. With 50% leverage, the equity falls from $50 million to about $40.9 million, a decline of roughly 18%. With 66% leverage, the equity falls from $34 million to about $24.9 million, a decline of nearly 27%. The same arithmetic also shows the path back: at a 5.5% cap rate, a 10% increase in NOI restores the property’s original value. How long that takes depends on the pace of rent growth, which is why the timing of the operating recovery matters as much as the rate move itself. 

How a 50-Basis-Point Cap Rate Increase Affects Equity Value:

Not every impact is negative, either. For investors in opportunity zone funds facing the December 31, 2026 inclusion date, taxable gain is based on the lesser of the original deferred gain or the investment’s value on that date. Where a lower mark brings the value below the deferred gain, it may translate into a smaller tax bill. A lower mark is not necessarily permanent, but in this case it could mean real tax dollars saved. Investors should consult their tax advisors about their specific situation.

How Does This Get Fixed and When? 

The same force pressuring valuations today is also working, more slowly, in the other direction. Higher rates make new construction meaningfully more expensive to finance, which is already showing up as fewer projects breaking ground, and fewer new units delivering in the coming years means less competition for the properties already standing. At the same time, higher rates make single-family mortgages more expensive, pushing homeownership further out of reach for a segment of buyers and adding to the pool of renters. Both effects reduce supply and support demand at the same time — exactly the ingredients that, historically, drive rents and NOI higher. 

The complication is timing. These two forces don’t move on the same clock as the rate move itself. A discount rate re-prices in an afternoon. Construction pipelines take years to slow, and it takes time for renters priced out of homeownership to show up as leasing demand. That mismatch is why a rate move can hit valuations immediately while the offsetting benefits, the ones that eventually claw much of that value back, take considerably longer to arrive. We expect the supply benefit to show up most clearly in 2027 and 2028, as today’s slowdown in construction starts translates into fewer new deliveries. 

Rising rates also create a second layer of pressure beyond the immediate hit to valuations: the cost of refinancing debt that’s coming due. Owners who financed acquisitions or construction with short-term bridge loans in 2020–2022, when rates and cap rates were near record lows, now face permanent-lender underwriting standards built around today’s higher rates and lower proceeds. Few owners have grown NOI enough to offset higher debt costs, and many are facing a funding gap at maturity. The difference between what a new loan will cover and what’s owed on the old one has to come from somewhere, typically a fresh infusion of rescue capital, a capital call to existing investors, or a sale.  

How We’re Positioned 

Risk management is core to our operating philosophy. We have always underwritten conservatively and don’t cross-collateralize our debt, which is designed to keep a problem at one property from spreading to the rest of a fund. Our primary goal today is to make sure every one of our investments is well positioned and optimized for cash flow. We are invested in high growth markets with strong long-term demand fundamentals, which we believe are well-positioned to recover as conditions normalize. Additionally, our Co-CEOs have a significant amount of their net worth invested side-by-side with investors.   

We’ve navigated a version of this uncertainty before. When COVID disrupted markets in 2020, our answer was to communicate more, not less: frequent calls, direct answers, and updates as the facts on the ground changed, rather than waiting until we had a complete picture. Our intention is to give our investors the facts as we see them and in a timely manner. Interest rates have moved sharply, and that has real, near-term consequences for valuations across parts of our platform.  

Rate cycles eventually pass, and whether this one proves to be a lasting shift or a temporary dislocation is something time will answer. Whichever it is, we will navigate it to the best of our ability for your benefit and ours and communicate regularly so you know what we know.  

Footnotes 
*This private credit investment is offered by Origin Credit Advisers, an investment advisor registered with the SEC. SEC registration does not constitute an endorsement of the firm by the commission, nor does it indicate that the advisor has attained a particular level of skill or ability.