JACKSONVILLE, FL – In the realm of multifamily real estate, two critical indicators are the Secured Overnight Financing Rate (SOFR) and the market yield of a ten-year Treasury note (DGS10). This article delves into the correlation between these two rates and their implications for real estate investment decisions. SOFR measures the cost of borrowing cash overnight collateralized by Treasury securities, serving as a replacement for LIBOR. It is considered less speculative and less manipulable than its predecessor. DGS10, the yield on a ten-year Treasury note, acts as a benchmark for mortgage rates and a barometer of long-term economic expectations. Both metrics significantly impact commercial real estate markets, making their understanding crucial for stakeholders.

Correlation Analysis: The Big Picture

Our analysis reveals a strong positive correlation between SOFR and DGS10, indicating that movements in one tend to mirror the other. The correlation stands at approximately 0.86, a robust relationship. Due to SOFR’s nature, its movements are slightly delayed. SOFR rates tend to spike around bank deadlines as banks seek liquidity in US repo markets. Therefore, if the ten-year yield falls, SOFR may not immediately follow. However, when averaged, SOFR rates show a similar relationship with ten-year yields.

The time series chart below illustrates the parallel trends of SOFR and DGS10 over time. This synchronized movement is pivotal for real estate investors as it affects mortgage rates and, consequently, the cost of financing real estate investments. While SOFR occasionally shows fluctuations not mirrored in Treasury yields, the overall trend remains aligned.

Year-Over-Year Changes

The year-over-year changes, while showing a more moderate correlation of 0.54, suggest that short-term fluctuations in SOFR are less reflective in DGS10 movements annually. SOFR is more temperamental than Treasury note yields, which typically exhibit more stability.

Our analysis is limited by the relatively recent adoption of SOFR as the standard in financial markets, officially replacing LIBOR in June of this year. To provide a more comprehensive analysis, a larger data set over a longer period would be ideal, allowing us to account for long-term market fluctuations and macroeconomic trends. Observing this correlation during a traditional recession could provide valuable insights.

Implications for Multifamily Real Estate

For multifamily real estate investors, understanding the relationship between SOFR and DGS10 is crucial. By monitoring these metrics, investors can make more informed decisions regarding future borrowing costs. Yields on Treasury notes can offer a predictive view of how SOFR rates might move in the near future. As Treasury yields recently fell from their highs, many expect SOFR to follow suit. However, it remains to be seen whether SOFR will align with these expectations.

In summary, while the correlation between SOFR and ten-year Treasury yields is strong, investors should consider the unique behavior of SOFR and its implications for borrowing and investment strategies. Keeping an eye on these indicators will help navigate the multifamily real estate market more effectively.

Our analysis underscores the importance of understanding the correlation between SOFR and ten-year Treasury yields. For multifamily real estate investors, this knowledge is essential for making informed decisions about future borrowing costs and investment strategies. By closely monitoring these indicators, investors can better navigate the complexities of the real estate market.

For a more in-depth analysis and to explore the detailed data and methodology behind these findings, read the full article here.

About Nuvo Capital Partners

Nuvo Capital Partners is a niche market-focused multifamily private equity firm operating throughout the Southeastern United States. As a dedicated sponsor (General Partner), we specialize in institutional quality real estate investments within these regions. Our team, with a combined 25+ years of experience, has facilitated over $700M in transactions (10,000+ units). Delivering a transparent investment process, we provide our investors with access to high-quality real estate opportunities, while also ensuring integrity throughout. Our commitment extends to providing monthly, quarterly, and yearly in-depth reporting for our valued investors. To learn more, visit nuvocapitalpartners.com.

If you are interested in learning more about Nuvo Capital Partners and the investment opportunities we are currently exploring, please feel free to contact us here.