John Wooden had a philosophy he instilled in his players at UCLA – “Be quick. But, don’t hurry!” That adage works well for our current situation in commercial real estate taking into account where we are now and where will be in 6-12 months.
Interest rates – despite the recent retreat above 4% on the 10-year treasury – are headed in the right direction finally. The Fed got the memo that inflation is in the rear view mirror, employment seems to be cooling, and now bank CEO’s like Moynahan at BofA are sounding alarm bells for the banking system and the economy generally. While the hoped for soft landing is a possibility, everyone should be wary since in fact it’s never actually happened! All of those factors point to downward pressure on interest rates over the course of this year and the Fed likely beginning the down process beginning in March.
So where does that leave investors. Folks purchasing commercial real estate might well be entering a ‘goldilocks’ period in which cap rates remain elevated and interest rates continue easing. That’s a recipe for higher gains and better opportunities. However, that will only be the case until demand once again picks up putting downward pressure on cap rates. Essentially, we are in the calm of the storm.
That’s where Wooden’s philosophy comes into play. Given the current market situation and supplies beginning to increase, investors will want to be ‘quick’ in scooping up potentially strong assets. At the same time, they don’t want to ‘hurry’ (basically rush frantically) into purchases. The fundamentals still apply about analysis of a property’s metrics, the market, historical information, and upward potential on NOI. That said, there will be some later in the year as supply continues to increase and rates decrease who will ‘hurry’ into purchases and make poor decisions. Sharp investors will not be in that mix!
I remain confident that the rate trends we saw in December will continue through the year as the Fed begins easing and bond purchasers realize prices will not dip any further. As the demand for those bonds increases (as there is a lot of capital waiting to buy them), rates should continue dropping. That said, nothing goes in a straight linear progression. There will be ups and downs. My main concern about the economy is in part that reference to ‘linear progression’. I hope the Fed recognizes that economic slowdowns tend not to be straight line declines, but more like accelerating slopes. If they don’t act quickly enough, it could be too late for the dreamy ‘soft landing’. However, even in that scenario, rates ease (perhaps faster) which in turn helps support the commercial real estate market.
As Dennis Miller used to say, ‘Those are just my thoughts. I could be wrong.’ What are your thoughts?
