Bond Market Plunge to Drive 40% Crash in Office Sector, Research Firm Says

• The rise in bond yields could trigger a price crash in the office sector, according to Capital Economics.
• That’s because rising government bond yields could impact interest rates on office buildings, driving down prices.
• The company predicts that office prices will fall by 40% by the end of next year.

According to Capital Economics, rising bond yields will contribute to the price of US office buildings falling by as much as 40% by the end of next year.

The research firm pointed to the recent rise in government bond yields, with ten-year bond yields recently reaching 5% for the first time since 2007.

The 10-year yield could fall to around 3.75% in 2024 before rising back to 4% in 2025, the company predicted in a note on Tuesday.

That’s probably because the neutral real rate – the rate that doesn’t make the economy grow or shrink – is likely higher than it used to be, meaning bond yields will remain higher overall in the long run.

Higher bond yields influence higher interest rates throughout the economy. In the commercial real estate industry, that can mean higher capitalization rates, or the expected return on the income a property generates.

Like bond yields, cap rates are inversely related to real estate prices, meaning higher cap rates will depress prices.

“Thanks to the upward revisions to our 10-year Treasury yield forecasts, we now expect a larger increase in interest rates,” said Kiran Raichura, deputy chief economist at Capital Economics. “At the level of all properties, this will mean that interest rates will rise by almost another 100 basis points to a peak of around 5.2%, causing an overall depreciation of more than 20%,” he added about the real estate sector as a whole.

Office cap rates could rise to 6.5% by the end of 2024, which could push office prices down by at least 40% from peak to trough, Raichura predicted. That reflects a steeper decline than his previous outlook, which saw prices falling 35% by the end of 2025.

Experts have warned of problems for the commercial real estate sector since the banking crisis in early 2023, which tightened lending standards. Banks are less willing to lend to risky, illiquid commercial real estate assets, and property owners who can refinance their mortgages must do so at much higher interest rates.

Experts have warned that this dynamic could herald a wave of distress as about $1.5 trillion of industry debt matures in the coming years.