A short-lived yield curve inversion (2-year Treasury yield exceeding 10-year Treasury yield) earlier this month sparked concerns about an impending economic downturn. Over the past 50 years, an inversion has fairly reliably predicted a recession within the next four quarters.

While an inverted curve can sometimes spell trouble for the U.S. economy, it’s not always a negative sign for commercial real estate values. In the early 1980s, when inflation was high like today, the NCREIF Property Index (NPI) appreciated by 5+% annually after the yield curve inverted, outstripping its long-run average of 2%. Despite the economic pain wrought by the bursting of the dot.com bubble, NPI appreciation essentially held steady in the wake of an inversion in 2000.

Commercial real estate values have suffered more acutely at times when credit flows notably contracted—such as the late 1980s and the Global Financial Crisis. A replay of those punishing periods is not expected in the near-term. However, more modest property performance may be in the offing, particularly if weaker economic growth reduces net operating income while higher interest rates put upward pressure on cap rates.

FIGURE 1: Appreciation return index, 100 = quarter of yield inversion (10-year and 2-year Treasury yields)