Published in January 2026 as a follow-up to Alpaca Real Estate’s Q2 2025 U.S. Treasuries and Tariffs whitepaper, this updated 2026 Interest Rate Outlook presents a comprehensive analysis of three structural forces that may keep 10-year Treasury yields elevated in the 4-5% range through 2026, fundamentally reshaping the commercial real estate investment landscape.

Key Findings:

• Treasury yields are likely to remain elevated at 4-5% over the medium-term, anchored by three structural forces: growing U.S. fiscal deficits with interest payments now consuming 53% of the deficit, receding foreign sovereign demand as holdings decline from 49% to under 32% of marketable debt, and the Bank of Japan’s abandonment of Yield Curve Control triggering capital repatriation as JGB yields rise to ~1.8%.
• Despite 100 basis points of Fed rate cuts in 2024, the 10-year Treasury yield rose nearly 100 bps into early 2025, with persistent Treasury supply, softening foreign demand, and global rate normalization contributing to higher structural borrowing costs despite front-end relief.
• U.S. fiscal deficits remain above 6% of GDP with net interest payments exceeding $1 trillion for the first time in FY2025, projected to reach $1.5 trillion by 2030, creating a fiscal doom loop where higher rates drive larger deficits requiring more Treasury issuance at elevated yields to attract price-sensitive domestic investors.
• With 10-year yields potentially anchored at 4%+, meaningful cap rate compression appears unlikely, while tariff-driven construction cost inflation (3-5% increase) constrains new supply, particularly benefiting industrial and multifamily assets in supply-constrained markets.
• Real estate operating fundamentals remained resilient in 2025: industrial delivered 5.3% NOI growth with 4.3% projected over three years, while multifamily achieved 1.6% NOI growth with 3.5% projected, underpinned by secular demand drivers including onshoring and severe housing shortages.

Alpaca Real Estate’s disciplined approach employs conservative underwriting with ~50bps buffers between entry and exit cap rates, concentrates on supply-constrained Sun Belt and manufacturing-heavy markets, and positions to capitalize on distressed opportunities as $1.5 trillion in commercial real estate debt matures through 2027.

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