Long term interest rates, in real and nominal terms, have fallen continuously since the early 1980s, and yields on commercial real estate have come down with them. Most recent analysis, suggests that it is real rather than nominal interest rates that dive property yields. Why?
So, what has driven long term real interest rates down? The fall in inflation is the main factor behind the decline in nominalinterest rates. The decline in real(i.e. inflation adjusted) interest rates has been more difficult to explain, but CBRE Research and others, point to the centrality of demographic change.
Specifically, tt is the growth, as a percentage of the global population, of the 40 to 54 age group that has driven down real bond yields, and property yields as well. Figure 1 illustrates the trend. It shows real 10-year bond yields in the United States, Germany and the UK alongside a line indicating the share of global population of those not aged 40 to 54. That line falls in the period since 1985, indicating that the proportion of those aged 40 to 54 has risen. Econometrics, not shown here, confirms a statistically significant relationship.