Higher For Longer, and Why U.S. Multifamily May Benefit

Why a higher risk-free rate may strengthen the case for owning existing apartments.

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The argument in brief

Rising long-term yields are usually read as bad news for real estate. Our view is that for U.S. multifamily rental housing, a structurally higher risk-free rate is closer to a tailwind than a headwind — provided you separate the short-term market reaction from the long-term fundamentals.

The short-term reaction is what you would expect. When the risk-free rate jumps, buyers demand higher yields, pricing resets and transactions stall. That repricing is a dislocation: a reaction to the speed of the move in bond markets, not a change in how many people need somewhere to live.

The long-term effect runs the other way. Higher rates make owning a home more expensive, which keeps more households renting for longer. They also make new apartments more expensive to finance, which slows the supply that would otherwise compete with existing buildings. More renters and fewer new units are a favourable combination for owners of existing rental housing.

Our view does not depend on rates coming back down. We think rates may well stay higher for an extended period, and that the case for U.S. multifamily holds if they do.

A spike, and a market reacting to its speed

The U.S. 10-year Treasury yield reached about 5.3% in early October, its highest level since 2002, then eased. It closed at 5.10% on October 15 and settled at 4.94% by October 30.¹ That is a decline of nearly 40 basis points in less than a month on a benchmark that is supposed to be the stable anchor of every valuation.

Real estate prices off that anchor. When it moves this fast, buyers widen their required yields to protect themselves, sellers who don’t need to sell step back, and pricing becomes harder to agree on. From time to time, as we have found in a recent acquisition, values can reset on the sheer speed of a move. If rental market fundamentals are not disrupted, this can represent a compelling entry point into a desirable market.

That is what we mean by a dislocation: a period when prices reflect the bond market’s volatility more than the asset’s income. Dislocations are when patient, well-capitalized buyers can acquire assets at pricing that reflects someone else’s urgency.

Why the risk-free rate may stay higher

The spike was sharp, but some of the forces behind it are not the kind that fade in a quarter. It helps to separate what could reverse from what looks structural.

The energy shock — potentially reversible. The conflict involving Iran has pushed oil prices sharply higher. U.S. headline CPI rose to 3.7% year over year in September, with gasoline accounting for more than half of the monthly increase.² Energy-driven inflation can ease if supply recovers, which is one reason long yields came off their highs.

Fiscal sustainability — structural. The IMF’s October 2026 Global Financial Stability Report named a disorderly spike in sovereign bond yields as one of three near-term risks to the global financial system.³ It linked that risk to elevated energy prices and to heavy government debt loads and refinancing needs. Investors asking for more compensation to hold long-dated U.S. debt is not a one-quarter story.

The practical conclusion: even if energy prices normalize, the floor under long-term rates may sit higher than it did for most of the last fifteen years. Expecting rates to stay higher for longer is, in our view, the more conservative way to approach real estate investments today.

Demand: higher rates keep households renting

The 30-year U.S. mortgage rate averaged 7.24% on October 29, down from a 2026 high of 7.40% but well above the 6.17% of a year earlier.⁴ On a US$400,000 loan, that move alone adds roughly US$285 a month to the payment, about 12% more (principal and interest only).

For a household deciding between buying and renting, that gap delays the decision to buy. Each year a would-be buyer keeps renting is another year of demand for rental housing. Higher rates also discourage existing owners holding low-rate mortgages from selling, which keeps the for-sale market tight and the rent-versus-own gap wide.

The rental data is consistent with this, though not yet conclusive. U.S. multifamily rents posted a 0.3% gain in Q3, the first third-quarter increase since 2022, and are up 1.4% year to date.⁵ Occupancy has risen about 50 basis points since January by Yardi’s revised measure. The fourth quarter, seasonally the weakest, will be an important test: advertised rents have fallen in Q4 in each of the past four years.

Supply: higher rates make new apartments harder to build

U.S. builders started apartments in buildings of five or more units at a seasonally adjusted annual rate of 349,000 in September, down from 471,000 a year earlier. Monthly starts are volatile, but deliveries are already falling: completions in buildings of five or more units are down 16% so far this year, after 2025 completions came in about 21% below 2024’s.⁶

The mechanism is simple. A new building only gets financed if its expected yield on cost clears the cost of construction debt by a comfortable margin. When borrowing costs jump, and energy-driven material costs rise alongside them, fewer projects clear that bar. They get shelved rather than cancelled, which is why new projects can stall quickly.

The effect arrives with a lag. An apartment started today typically delivers in two to three years, so today’s low starts translate into a thinner supply pipeline later this decade. For owners of existing buildings, that means less new competition for tenants over the same window in which higher rates are keeping households renting.

Why values can recover without rate cuts

The common assumption is that real estate values only recover when rates fall. That treats the cap rate as a pure function of the risk-free rate. It isn’t. A simplified way to see what sets it:

Cap rate ≈ Risk-free rate + Risk premium − Expected income growth

Rates are one of three inputs. The other two can move on their own.

The risk premium can narrow as volatility settles. Much of the recent repricing is buyers demanding extra compensation for uncertainty about where rates are going. If long yields stabilize — even at a higher level — that uncertainty premium can shrink. Capital that has waited on the sidelines tends to return once the anchor stops moving, and competition for scarce, stabilized assets returns with it.

Expected income growth can rise. The demand and supply effects described above both point to firmer rent growth over a multi-year horizon. If investors come to price that in, cap rates can compress with no help from the bond market. For managers that actively grow net operating income (NOI), such as value-add or core plus strategies, the income lever can represent much more of a tailwind than more passive, core strategies.

Relative appeal can shift. If inflation proves persistent, housing income that resets annually with leases becomes more valuable relative to fixed-income alternatives. A correction in crowded trades elsewhere could also redirect capital toward real assets, though that is less certain: broad market stress can tighten conditions for everyone.

What this means for advisors and their clients

The useful question for a client is not whether rates will come down. It is whether an investment’s income holds up if they don’t. For U.S. rental housing, higher rates weigh on values in the short run while strengthening the demand and supply conditions that support income over time.

Explaining it to clients. The case can be made in a few sentences:

Higher interest rates have made it more expensive to buy a home in the U.S. and harder to finance new apartment buildings. Both keep demand for existing rental housing firm. At the same time, the jump in rates has pushed down prices for some apartment buildings, so a buyer today can pay less for each dollar of rent coming in. The case rests on the rent tenants pay, not on rates falling.

What Canadian investors should consider. Any U.S. private real estate investment raises practical questions that Canadian investors should work through with their advisor:

• U.S. real estate earns income and is valued in U.S. dollars. What a Canadian investor receives depends on the exchange rate when capital goes in and when it comes back, which can add to or reduce returns in Canadian-dollar terms.
• U.S. real estate can involve tax reporting and obligations in both countries, depending on the investor and the investment structure. These should be reviewed with a qualified cross-border tax professional.
• Time horizon. Private real estate is a long-term investment, and the case described here plays out over years. Capital is typically committed for a defined period, so the holding period should fit the client’s plans.
• Fees and leverage. Investors should understand the full cost of an investment and how much borrowing is used, since both affect what they receive.
• Portfolio fit. Many Canadian clients already hold significant real estate exposure through their homes and Canadian property. How a U.S. rental allocation sits alongside that is worth discussing.

Greybrook welcomes these questions from advisors and their clients.

Rates will keep moving, and no one can time them precisely. What matters more for U.S. multifamily is whether households keep renting and whether new supply stays constrained. On both counts, we believe higher rates are working in the sector’s favour.

^{(1) Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates (via FRED, series DGS10); U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, October 5–30, 2026..
(2) U.S. Bureau of Labor Statistics, Consumer Price Index, September 2026, released October 14, 2026..
(3) International Monetary Fund, Global Financial Stability Report, October 2026.
(4) Freddie Mac, Primary Mortgage Market Survey, October 29, 2026.
(5) Yardi Matrix, Multifamily National Report, September 2026, released October 7, 2026.
(6) U.S. Census Bureau and HUD, New Residential Construction, September 2026, released October 20, 2026.}