Multifamily Investing: The Relationship Between Cap Rates and 10-Year Treasury Bills When Evaluating Risk

The 10-year U.S. Treasury bill (“10-Y T-bill”) is widely considered to be a “risk-free” investment with a locked-in rate of return. Because of this, the 10-Y T-bill can be viewed as a fair barometer when gauging investors’ sentiment toward alternative investments and what they are willing to risk for an expected rate of return. What this means is if an investor believes there are increased risks, they often fall back on historically safer options to preserve capital in the interim.

So how can a person compare something like a T-bill with an alternative investment that cannot be forecasted with such absolute ROI? Real estate investments resolve this by calculating a capitalization rate (“cap rate”). Cap rates can be calculated in a variety of ways, but generally, it is the ratio between the Net Operating Income (“NOI”) and the asset’s value. This provides the most accurate yield possible for the property and allows investors a way to compare expected yields between assets.

By comparing an asset’s cap rate to the return of the 10-year U.S. Treasury bill, it affords investors a premium (“spread”) between the two yields. If the spread advantage is “high enough”, in favor of the alternative investment to justify the presumed risk, the riskier investment becomes increasingly more attractive. It boils down to; how much potential compensation would be attractive enough for someone to risk an investment versus taking the less risky option, such as a U.S. government-backed bond?

Multifamily real estate performance compared to the 10-year U.S. Treasury bill

Real estate provides an excellent comparison with the 10-Y T-bill as real estate has generally been seen as a risk-averse investment that produces outsized returns while providing portfolio diversification at the same time. Today, most real estate underwriting compares cap rate yields against the average annual return rate of the 10-Y T-bill from 1986-2021. It provides a more reliable baseline compared to any given year’s rate. For example, the historic, annual average rate from 1986-2021 is 4.7%. Compare this to an unprecedented 2020-21 where the 10-Y rate dropped to a historic 0.9%. Over the next 10 years, investors would want their investments to easily outperform 4.7%, not the 0.9% exception. Otherwise, why bother investing in anything other than the 10-Y T-bill.

Looking deeper into real estate cap rates within figures 1 and 2, we can see that cap rates have outperformed the 10-Y T-bill average since 1986. However, not all property types have performed equally. Beginning in 1994, the multifamily cap rate has remained well below other property types, providing less risk while still outperforming the 10-Y T-bill. Over the long-term, the historical average spread between the multifamily cap rate and 10-Y T-bills stands close to 2.15%, or 215 basis points. More recently, since the 2008 Great Recession, the spread has increased close to 3.15%.

What do we expect for the next 5 years?

Cap rate

We expect the current value cap rate (appraised properties) to remain low from 2021-2026 with an annual average of 4.8%. The transaction cap rate (sold properties) will continue its recent historical relationship of being about 1%, or 100 basis points, higher than the current value cap rate. The same is true for the cap rate by property type. This means that multifamily assets will continue to have lowest cap rate for commercial properties.

10-Y T-bills

We expect the 10-Y T-bill will remain just below the 2% mark this year (2021). However, as the base rate rises starting next year, expect the yields on 10-Y T-Bills to rise to an average of around 2.5% from 2021-2026. We also expect cap rate and T-bills to peak during 2023.


We expect an annual average spread of 2.29% from 2021-2026 in favor of cap rates, which is better than the long-term average of 2.15%. We also expect that an increase in 10-Y T-bills will have little impact on cap rates other than a narrowing but healthy spread during the same period. Here is some of our reasoning.

  • Commercial and residential real estate as investment vehicles remain attractive and are expected to remain the preferred investment vehicle for a couple more years. The demand for real estate investment is expected to keep cap rates low. Multifamily and industrial will lead the demand this year. Office space will see an above average bounce back in fundamentals starting in the middle of next year.
  • Mathematically, data from recent years shows that a 1% increase in 10-Y T-bills increases the cap rate by about 0.30%. Our outlook is conservative, in that, we believe it would be around a 0.50% increase in cap rate.
  • Given the fact that the global economy remains weaker than the U.S., the United States market is expected to be seen as a “safer” economy to attract capital from around the world through 2024. A portion of that capital will continue to flow into real estate investments, keeping demand healthy.
  • The increase in interest rates points to the Fed’s increased confidence in the U.S. economy. Real estate fundamentals have a high correlation (of about 85%) with job growth. The confidence in expanding job growth will carry the real estate fundamentals to a healthy territory during the outlook, keeping cap rates low.
  • Years of a near-zero federal funds rate and multiple economic stimulus to fight the economic impact of the pandemic has threatened the U.S. economy with high inflation rates. But the real estate investment has always been thought of as a hedge against inflation. Therefore, expect low cap rate despite the increase in risk-free rates.

It is our perspective that the historical relationship between cap rate and the 10-Y T-bill will continue. However, even though we expect 10-Y T-bills to peak around the 3% range in 2023, we foresee only a slight increase in cap rates and the spread will narrow only when compared to recent history.