The gateway city framework has structured institutional real estate allocation for the better part of four decades. It rests on durable premises: market depth, capital liquidity, institutional-grade tenant bases and legal certainty. None of those premises have disappeared. What has disappeared is the rate environment that made the returns available on gateway assets sufficient to justify their risks.
When the 10-year Treasury yielded less than 2 percent, a stabilized Manhattan office asset at a 5 percent cap rate carried a spread of 300 basis points over the risk-free rate. That spread, however thin, could be rationalized. It no longer can. With 10-year Treasuries in the 4.2 percent to 4.6 percent range and investment-grade corporate credit available above 5 percent, a gateway office asset delivering 5.5 percent on in-place income — before vacancy risk, deferred capital expenditures and the structural demand impairment that hybrid work has introduced — does not clear the
