Will the Real Risk Premium Please Stand Up? - Cap Rates via Multifamily Executive Magazine

One of the key metrics that multifamily investors consider before pulling the trigger on a deal may not be what it appears.

The spread between the yield on the 10-year Treasury and a given capitalization rate is also called the risk premium—and the wider that spread, the better. In the frothiest days of the last boom period, in late 2006, that spread was around 90 basis points (bps), a razor-thin margin.

With the 10-year Treasury still around 2 percent, and the average cap rate around 6.5 percent, today’s average risk premium is a healthy 450 bps. But given the Treasury Department’s concerted effort to keep interest rates low, can today’s risk premium be trusted?

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