
Introduction
Commercial real estate (CRE) and U.S. Treasury bonds are two distinct asset classes that often compete for capital in a portfolio. CRE offers ownership of tangible properties with income and growth potential, while Treasury bonds offer government-backed safety and fixed interest payments. Sophisticated investors compare these investments to balance higher returns against stability and liquidity. This article provides an analytical comparison of CRE vs. Treasury bonds, covering their characteristics, performance, risks (including sovereign debt concerns), and the key factors that guide allocation decisions.
Understanding Commercial Real Estate as an Investment
Commercial real estate refers to property assets that generate income through business use or leasing. Investing in CRE means acquiring properties (directly or via funds/REITs) to earn rental income and benefit from potential value appreciation. Key characteristics of CRE investments include:
- Types of Properties: Office buildings, retail centers, industrial warehouses, multifamily apartment complexes, hotels, and specialized facilities all fall under CRE. Different property types have varying risk-return profiles and market dynamics (for example, multifamily housing often has lower yields but steadier occupancy, whereas hotels and retail can be higher-yield but more cyclical).
- Income and Returns: CRE investments generate rental income (often through multi-year leases) and can appreciate in value over time. Returns vary widely by location and property type, but prime commercial properties have historically delivered total returns in the high single digits or above. This comes from steady cash flow plus long-term capital growth when properties are sold or re-financed at higher values.
- Risks and Management: Real estate carries risks such as vacancies, tenant defaults, economic downturns, and unforeseen expenses (repairs, redevelopment costs). Properties also require active management or professional oversight for leasing, maintenance, and legal compliance. Additionally, CRE is relatively illiquid – selling a building can take months and involve significant costs – so investors must be prepared to commit for the medium to long term. Diversifying across property types and markets can help mitigate some risks.
- Interest Rate Sensitivity: CRE values and financing costs are sensitive to interest rates. When interest rates rise, mortgage loans become more expensive and investors often demand higher capitalization rates (cap rates) – i.e. a higher annual return on purchase price – to justify the investment. Higher cap rates mean lower property valuations. Conversely, when interest rates are low or falling, debt financing is cheaper and income-producing real estate becomes more attractive, often driving property prices up. In essence, a rising rate environment can put downward pressure on CRE values, while a low-rate environment can inflate them.

Understanding Treasury Bonds as an Investment
Treasury bonds (often referred to collectively as “Treasuries”) are debt securities issued by the U.S. government. They are considered one of the safest investments in the world, backed by the full faith and credit of the U.S. Treasury. When you invest in Treasuries, you lend money to the government in exchange for regular interest payments and return of principal at maturity. Key aspects of Treasury bond investments include:
- Types of Treasury Securities: The U.S. Treasury issues short-term Treasury bills (maturities of a few days up to 1 year), medium-term Treasury notes (2, 5, 7, or 10 years), and long-term Treasury bonds (20 or 30 years). It also offers Treasury Inflation-Protected Securities (TIPS), which adjust their principal value with inflation to protect investors’ purchasing power. This range of maturities allows investors to choose duration and yield according to their needs.
- Yield and Interest Dynamics: Treasuries pay a fixed interest rate (coupon) at regular intervals. Their yields and prices move inversely: when market interest rates rise, existing bond prices fall (so their yields rise to stay competitive); when rates fall, bond prices rise (yields drop). The yield curve — the relationship between short-term and long-term Treasury yields — is closely watched as it often signals economic expectations. For example, a normal upward-sloping yield curve implies stronger growth and inflation expectations (higher yields for longer bonds), while an inverted curve (short-term yields above long-term yields) can signal economic uncertainty or a coming recession.
- Risk Profile: In terms of credit risk, Treasuries are virtually risk-free since the U.S. government is expected to honor its debt obligations (it can also print dollars if needed). However, Treasuries are not risk-free in other respects. They carry interest rate risk: longer-term bonds can experience significant price volatility as interest rates change (e.g., a 30-year bond will drop sharply in price if overall rates rise). They also face inflation risk: because they pay fixed interest, high inflation erodes the real value of the interest and principal over time. (By contrast, TIPS mitigate this by design.) Additionally, there is reinvestment risk — if your bond matures or pays interest, you might only be able to reinvest at lower yields prevailing at that future time, especially in a declining rate environment.
- Performance and Liquidity: Treasury bonds offer stable interest income and extremely high liquidity. There is a vast, active secondary market for U.S. Treasuries, meaning investors can buy or sell these bonds at any time with minimal transaction costs. In terms of performance, Treasuries tend to have low volatility relative to stocks or real estate (especially for short and intermediate maturities). They often serve as a safe haven in portfolios: during stock market downturns or financial crises, Treasuries typically hold their value or even increase in price as investors seek safety. However, over the long run, their total returns are usually lower than those of riskier assets – essentially trading return potential for stability.
Performance Comparison: Commercial Real Estate vs. Treasuries
How do commercial real estate and Treasuries stack up against each other in practice? Investors often compare their yields, volatility, and behavior under different economic conditions. Below is a breakdown of key performance dimensions:
Yield and Income
Commercial properties typically offer higher annual yields than Treasuries, reflecting their greater risk. The capitalization rate (annual net operating income divided by property value) for CRE might be in the 5%–8% range for many markets, whereas the yield on a 10-year Treasury bond might range from 2%–4% in a normal environment (though it fluctuates over time). This difference, often called the “yield spread” or risk premium, compensates investors for the added risk and illiquidity of real estate. A wider spread suggests that CRE is offering relatively attractive income compared to the safe return of Treasuries; a narrow spread means investors are accepting lower extra return for taking on real estate risk. It’s also important to note that CRE returns can come from both income and property value appreciation, whereas Treasury bond returns come solely from interest payments and any price change if sold before maturity.
Volatility and Liquidity
Treasury bonds and CRE exhibit very different volatility and liquidity profiles. Treasuries have transparent daily pricing and can swing in value with every interest rate move or economic data release. For instance, a long-term Treasury bond can lose value quickly when interest rates spike (as happened in 2022 when rapidly rising rates led to one of the worst years on record for bond prices). CRE, by contrast, does not have daily quoted prices – property valuations are assessed infrequently, and transactions occur on much longer timelines. This means real estate values appear more stable in the short term (they aren’t marked-to-market daily). However, that doesn’t mean CRE is immune to volatility; property prices can and do adjust, but usually over quarters or years. In a severe downturn or credit crunch, real estate values can fall significantly (for example, commercial property prices dropped during the 2008 financial crisis, and certain sectors faced price declines when interest rates surged in 2022–2023).
Liquidity is another stark difference. Treasuries are one of the most liquid investments available – an investor can sell millions of dollars worth of Treasury notes or bonds in seconds with minimal impact on price. Commercial real estate is illiquid; selling a property is a complex process involving finding a buyer, due diligence, and closing, which can take months and incur brokerage and legal fees. This illiquidity means that while CRE prices might not display volatility day-to-day, an investor cannot quickly exit the investment if market conditions change. The liquidity advantage of Treasuries gives investors flexibility to rebalance or raise cash, whereas CRE requires a long-term mindset and a liquidity premium (extra return) to compensate for this constraint.
Inflation Impact
Inflation affects these asset classes in different ways. CRE often serves as an inflation hedge: as general prices rise, landlords can often increase rents (especially in multi-year leases with inflation escalators or in shorter-term leases that reset to market rates). Higher replacement costs for buildings can also drive property values up over time. This means that during inflationary periods, the income from real estate and underlying property values tend to rise, helping investors maintain their real (inflation-adjusted) returns. In contrast, standard Treasury bonds have fixed nominal payments which lose purchasing power when inflation jumps. If inflation runs above the bond’s yield, the investor’s real return is negative. There are inflation-protected bonds (TIPS) as noted, but regular Treasuries will underperform in high-inflation environments. Thus, in a scenario of rising inflation, CRE can potentially offer better protection for wealth, whereas Treasuries perform best when inflation is low and stable (or in deflationary scenarios where fixed payments gain value in real terms).
Historical Trends
Historically, commercial real estate and Treasury bonds have shown different long-term performance patterns and cyclicality. Over multi-decade periods, CRE has generally delivered higher total returns than Treasury bonds, primarily due to the equity-like upside in property values and rent growth. For example, institutional real estate indices have often recorded average annual returns in the mid to high single digits (and even double-digit returns during strong market expansions), whereas long-term Treasury bonds might average a lower single-digit annual return over the long run. That said, the volatility and timing of returns differ. There have been periods when real estate underperformed badly – e.g., U.S. commercial property values slumped in the early 1990s and again during the 2008–2009 recession – while during those same periods, Treasuries performed well as investors flocked to safety.
Conversely, in the late 2010s when interest rates were ultra-low, Treasuries offered very modest returns and many investors shifted toward real estate and other assets to seek higher yields, contributing to surging property values. Another point is how each behaves in crises: in sharp market downturns or panic (such as the 2008 financial crisis or the initial phase of COVID-19 in 2020), Treasury bonds typically rally in price (yields fall) as a safe haven, providing crucial stability to a portfolio. Real estate values often don’t immediately reflect a crisis but can decline afterward if the economic damage leads to lower occupancy or rent. Overall, the two asset classes have low correlation at certain times – meaning the performance of one does not move in lockstep with the other. This characteristic is valuable for diversification: holding both can smooth out portfolio performance, as Treasuries tend to cushion against downturns while CRE can boost returns during growth periods or inflationary times.
Sovereign Debt Issues & Risks in Treasury Bonds
U.S. Treasuries are sometimes called “risk-free” in terms of default risk, but it’s important to recognize the broader context of sovereign debt when assessing their safety. In recent years, investors have paid closer attention to the U.S. fiscal position and related risks. Key issues include:
- Rising U.S. Debt Levels: The United States has a very large and growing national debt (over $30 trillion in gross federal debt as of mid-2020s). Debt-to-GDP ratios are at historically high levels (on the order of ~100% of GDP or more, depending on the measure). A mounting debt burden raises concerns about long-term fiscal sustainability. While the U.S. can technically always issue more currency to pay debts, excessive debt growth could eventually lead to difficult choices, higher taxes, or reliance on inflation to reduce the real burden. Investors keep an eye on metrics like debt-to-GDP and annual budget deficits when evaluating the long-run risk of holding Treasuries.
- Credit Rating and Default Risk: Although an actual U.S. default is extremely unlikely, credit rating agencies have expressed concerns. In August 2011, amid a political standoff over the debt ceiling, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+ for the first time. More recently, Fitch downgraded U.S. sovereign debt to AA+ in 2023, citing expected fiscal deterioration and repeated debt-ceiling brinkmanship. These actions were largely symbolic (U.S. borrowing costs remained low immediately afterward), but they highlight that even Treasuries carry political and fiscal risks. Periodic battles in Congress over raising the debt ceiling create uncertainty that, in a worst-case scenario, could delay interest payments. Such events remind investors to monitor the political climate as part of their risk assessment.
- Foreign Demand and Geopolitics: A significant portion of U.S. Treasury securities is held by foreign governments and investors (notably China, Japan, and oil-exporting nations). This global demand has been a pillar of support for low U.S. interest rates. However, geopolitical shifts could impact this dynamic. If major foreign holders reduce their purchases of Treasuries or sell off holdings — whether due to geopolitical tensions, a desire to diversify reserves, or economic needs at home — it could put upward pressure on U.S. yields. For instance, in recent years China has gradually trimmed its Treasury holdings, and any acceleration of that trend might raise concerns. The U.S. must attract sufficient buyers for its continuous issuance of new debt; strong foreign demand has generally made this easy, but any faltering in overseas appetite (or a major investor like the Federal Reserve tightening its own purchases) can lead to higher financing costs.
- Inflation and Currency Risks: One way extremely high national debt could be managed is through inflation – effectively eroding the real value of debt over time. While the Federal Reserve does not explicitly aim for high inflation, heavily indebted governments have an incentive to keep interest rates below the rate of inflation if possible. This scenario is risky for bond investors: if inflation stays persistently above a bond’s yield, the bondholder loses real wealth. The late 1960s and 1970s in the U.S. were an example where inflation surged and bond investors suffered poor real returns. Additionally, Treasuries are denominated in U.S. dollars; if confidence in the dollar were to decline internationally (for example, due to reckless fiscal policy or geopolitical factors), foreign investors might demand higher yields to compensate for potential currency depreciation. So far, the dollar’s status as the world’s reserve currency has bolstered Treasuries, but it’s a factor sophisticated investors watch when considering long-term Treasury exposure.
Investment Decision Factors: Choosing CRE vs. Treasuries
Deciding between allocating funds to commercial real estate or to Treasury bonds (or what proportion to each) depends on an investor’s individual circumstances and the market context. Key factors to consider include:
- Return Objectives: Consider your target returns and income needs. CRE offers the potential for higher yields and asset appreciation, which can help achieve higher overall returns if things go well. If an investor is aiming for, say, a 8%+ annual return, a portfolio of quality properties might make that feasible, whereas an all-Treasury portfolio would not. On the other hand, if an investor is content with a 3–4% low-risk yield, a ladder of Treasury bonds could meet that goal with much less volatility. The expected spread between CRE cap rates and Treasury yields is a critical metric – if CRE is only offering a small increment over Treasury yields, some investors may opt for the safer bonds, but if CRE offers a significantly higher yield, it becomes more enticing.
- Risk Tolerance: This is perhaps the clearest differentiator. Investors with low risk tolerance (who cannot stomach the possibility of losing principal or facing income disruptions) will lean towards Treasuries, given their near-certainty of payment and government backing. Those with higher risk tolerance and a desire for growth will consider CRE to take on more risk in exchange for more reward. It’s also about the type of risk: Treasuries primarily have interest rate risk (and inflation risk) but no credit risk, whereas CRE has property-market risk, credit risk (tenants might default), and operational risks. A sophisticated investor will assess which set of risks they are more comfortable managing.
- Liquidity Needs: If you anticipate needing to free up cash quickly or frequently rebalance your portfolio, Treasuries are far more suitable. They can be sold at a moment’s notice in the secondary market. CRE should be viewed as a long-term, illiquid investment – capital deployed in real estate may not be readily accessible for years without selling the asset (which, as discussed, is time-consuming and possibly costly). Therefore, investors with short-term obligations or uncertain liquidity needs should be cautious about over-allocating to illiquid assets like real estate. In practice, many investors hold Treasuries (or other liquid assets) as a reserve or safety net to avoid having to sell real estate at an inopportune time.
- Time Horizon: Related to liquidity, the investment horizon is crucial. Treasury securities come in various maturities and can match short or long horizons. For example, if an investor knows they will need funds in two years, they can buy a 2-year Treasury note and have confidence the money will be returned at that time. CRE investments, on the other hand, generally require a multi-year horizon to realize their full value. Buying a commercial property typically involves a business plan that might span 5–10 years (improving the property, leasing it up, then potentially selling or refinancing). If you have a long time horizon and won’t need to liquidate, CRE’s illiquidity is less of a concern and the long-term nature can be an advantage (allowing compounding of rental income and growth). If your horizon is short, Treasuries or other liquid instruments are usually more appropriate.
- Macro-Economic Outlook: Your view on the economy, interest rates, and inflation should influence your choice. If you expect a strong economy with rising demand for real estate, low vacancy, and possibly higher inflation, CRE could outperform by providing growing income and values. In such an environment, fixed-rate Treasuries might lag (because interest rates could rise or inflation could eat into returns). On the other hand, if you fear an economic downturn or deflation, Treasuries are a safe harbor that will likely hold value or rally, whereas CRE might face challenges (e.g., higher vacancies, pressure on rents, difficulty refinancing if credit conditions tighten). Similarly, if interest rates are currently high and you believe they will fall in the future, locking in high yields on Treasuries can be very attractive, and the value of those bonds would rise if rates indeed drop. Conversely, if rates are low and likely to rise, one might be wary of long-term bonds and perhaps favor real estate where leases can reset and values might only temporarily dip. Savvy investors often adjust their allocations in anticipation of or response to such macro trends.
- Diversification and Portfolio Role: Finally, consider how each asset fits into your overall investment portfolio. Treasuries provide stability, income, and a hedge against stock market crashes (and are often negatively correlated with risk assets during crises). CRE provides an alternative return stream that isn’t directly tied to stock or traditional bond performance, plus a degree of inflation protection. Many sophisticated portfolios include both – for example, using a core holding of Treasuries to anchor the portfolio and manage risk, alongside an allocation to real estate for higher income and growth. The proportion of each will depend on the individual’s strategy (a very conservative portfolio might be heavy on bonds, while an aggressive, long-term investor might allocate more to real estate or equities). The key is that including both can improve risk-adjusted returns by balancing the strengths and weaknesses of each.
Changing Interest Rates & Market Impact
Interest rate fluctuations have a profound impact on both Treasury bonds and commercial real estate, though in different ways. Since interest rates affect the cost of borrowing and the relative attractiveness of all investments, changes in rates can shift the balance between CRE and Treasuries in an investor’s favorability.
When interest rates rise, bond prices fall. For existing Treasury holders, rising rates mean the market value of their bonds declines (though new buyers can now earn higher yields). Rapid rate increases can thus generate short-term losses for bond investors, as seen in 2022 when the U.S. Federal Reserve’s aggressive rate hikes led to a sharp drop in the value of many bond portfolios. On the positive side, those higher rates eventually allow investors to reinvest or allocate new money into bonds at more attractive yields. In the CRE market, rising interest rates are generally a headwind. Higher rates translate to more expensive mortgages and higher debt-service costs for property owners. This typically forces property prices downward because buyers factor in the higher financing costs and demand better returns. In practice, cap rates tend to rise alongside interest rates, which inversely pushes property values down. We saw this dynamic recently as well: as benchmark Treasury yields climbed in 2022–2023, prospective real estate investors became more cautious and property valuations in some sectors (especially those like office buildings already facing challenges) adjusted lower to reflect the new higher-yield environment. Additionally, owners needing to refinance loans during a high-rate period might see cash flow reduced or might even be forced to sell if they can’t cover the new interest costs, which can further pressure the real estate market.
When interest rates fall, the situation reverses. Bond prices rise (existing bonds with higher coupons become very valuable), rewarding those who held fixed-rate bonds through the decline in rates. However, new buyers of bonds now face lower yields going forward. In a low-rate environment, income-focused investors often turn to alternatives like CRE to find better returns, since Treasuries might be paying only modest interest. Cheap credit also fuels real estate activity: investors can borrow at lower rates, which increases their potential return on equity and often leads to **cap rate compression** (property yields falling because prices are bid up). A good example was the decade after the 2008 financial crisis through the late 2010s, when interest rates in the U.S. were kept historically low. Treasury yields were minimal, and as a result, institutional and individual investors poured capital into commercial real estate (and other higher-yield assets), driving property values to record levels in many markets. Refinancing existing real estate debt at lower rates improved cash flows, and new development was spurred by the low cost of capital. For investors balancing between the two asset classes, periods of low rates often justified a higher allocation to CRE or other risk assets, whereas periods of high rates made the relative safety of bonds more appealing.
In summary, interest rate trends can tilt the playing field between CRE and Treasuries. It’s wise for investors to monitor central bank policies and bond market indicators (like the 10-year Treasury yield) as part of their strategy. Often, a dramatic change in interest rates is a signal to re-evaluate one’s portfolio allocation. For example, if yields on Treasuries surge to very attractive levels, an investor might shift some funds into bonds for a stable return, whereas if rates are very low, one might accept more real estate exposure to chase higher income. Successful investment management involves anticipating or responding to these shifts – effectively timing the relative emphasis on CRE vs. Treasuries to align with the interest rate cycle and broader market conditions.
Conclusion
Commercial real estate vs. Treasury bonds is not an “either/or” choice but a spectrum of opportunities to balance risk and return. Treasuries offer unparalleled capital preservation, liquidity, and predictability, making them ideal for the portion of a portfolio where safety and steady income are paramount (or during times of economic uncertainty). In contrast, commercial real estate provides the potential for significantly higher returns, income growth, and inflation protection, which can greatly enhance an investor’s long-term wealth building — but it comes with higher risk and requires due diligence and patience. The decision of when to favor one over the other comes down to market conditions and personal investment goals. For instance, in a low-rate, growing economy environment, it may make sense to overweight CRE to capture higher yields and appreciation. When the economic outlook is weak or rates are rising sharply, a greater allocation to Treasuries can protect capital and reduce volatility.
Many sophisticated investors will allocate to both asset classes simultaneously, adjusting the mix over time. The interplay between CRE and Treasuries can actually be complementary: the stability of bonds can offset real estate’s cyclicality, and real assets can provide returns when fixed-income yields are low. By staying informed about interest rate trends, property market conditions, and fiscal developments, investors can make proactive choices about where to deploy capital. Ultimately, the goal is to create a resilient portfolio – one that leverages the steady strength of U.S. Treasuries and the growth potential of commercial real estate.
In the current market, we encourage investors to analyze their portfolio and the prevailing economic signals. Are bond yields sufficiently high to meet your needs, or is now a good time to seek out well-priced real estate deals for higher income? It could be an opportune moment to rebalance. For those interested in pursuing the opportunities that commercial real estate offers, consider exploring the options available on specialized marketplaces.
Brevitas is one such platform that provides access to exclusive commercial real estate listings and investment opportunities worldwide. Sophisticated investors can use Brevitas to find deals that match their criteria and leverage the platform’s network and tools to inform their investment decisions. In an ever-changing financial landscape, having access to quality CRE opportunities is essential for capitalizing on this asset class.
Explore CRE Opportunities on Brevitas
References
- Commercial Real Estate Investment Overview – Investopedia
- U.S. Treasury Bond Pricing and Yield Calculations – Investor.gov
- Federal Reserve Interest Rate Data
- U.S. Treasury Securities Overview – TreasuryDirect.gov
- U.S. Credit Rating Downgrade Analysis – Reuters
- NAREIT Market Commentary and Analysis
- CRE Market Trends and Insights – CBRE Research
- U.S. Treasury Bond Market Overview – Bloomberg
- TreasuryDirect Official Website
- Commercial Real Estate Insights – CBRE Research
- Brookings Institution Economic and Market Analysis