Marcus & Millichap flags rising cost pressure on industrial CRE as 10-year Treasury tops 5%

The 10-year Treasury yield touched 5% on Sept. 14, a level Marcus & Millichap says was reached in 2023 and otherwise unseen since 2007, and by Oct. 1 the yield sat between 5.23% and 5.33%, according to the brokerage's latest industrial write-up as covered by Connect CRE. The firm reads that level as reason for the sector to stay on guard.

The caution rests on inflation data that showed CPI up 3.4% year over year and core CPI, excluding food and energy, up 2.4%, both monthly readings, Marcus & Millichap notes, were the highest since May. The firm attributes the pressure to renewed energy costs and other price increases tied to hostilities in the Persian Gulf, and the gasoline index climbed 3.9%. Evolving tariffs could then raise costs further on imported consumer goods, construction materials and business equipment.

For industrial landlords the strain arrives on two lines at once: distribution expenses, which the firm expects to rise, and tenant demand, which it expects to soften. The offset sits on the supply side, where slowing construction activity should ease supply pressure and give existing properties a better chance of absorbing both.

Los Angeles shows how uneven the demand half has been: port volume rose 1.8 percent and leasing hit a five-year high as cargo swung west this summer, yet vacancy reached a recent peak of 7 percent and rents were still falling, as this publication wrote in August. Freight swings move volume; whether they move rents is a different question.

Industrial's cushion on this reading is scarcity rather than pricing power: the construction freeze across property types hands the advantage to whoever already owns the building. Industrial ought to be the clearest case for that advantage, because the tariffs Marcus & Millichap flags land on exactly the materials a new warehouse consumes. But a 10-year Treasury above 5% raises the cost of every refinancing and acquisition loan against a rent roll that, in at least one major port market, was still falling this summer.

With the 5-handle Treasury now the underwriting denominator, industrial's version of that test is whether debt priced above 5% meets tenants whose own distribution costs are climbing. Marcus & Millichap's framing is that the volatility may persist, leaving elevated long-term yields to feed uncertainty for businesses, consumers and commercial real estate investors alike.

Slower starts now have to reach the rent line before the cost of capital does.