What Does the Inverted Yield Curve Mean for CRE?

PORTLAND, OR—Long-term interest rates on bonds reached below short-term rates for the first time since 2007 and yields for the two-year Treasury bill exceeded those of the 10-year Treasury bill for a brief period. This inverted yield curve has historically preceded national recessions by five to 18 months. In this exclusive, Adam Hooper, co-founder and CEO of RealCrowd, recently shared insights about what the inverted yield curve means for the commercial real estate industry, how interest rate cuts could impact the market and which opportunities exist in the current market climate.

GlobeSt.com: What does the inverted yield curve mean for commercial real estate?

Hooper: Experts are divided on whether the recent yield-curve inversion indicates a recession is forthcoming. While an inverted yield curve has occurred shortly before previous recessions, current conditions are atypical of a pre-recession scenario. In fact, certain economic indicators–such as high consumer confidence, low interest rates and strong employment figures–bode well for a continued period of the recovery and prosperity we have seen for the past decade, although the growth may be leveling off a bit.

These indicators predict a bright outlook for the general economy and commercial real estate as well. Add in the fact that CRE has been behaving conservatively ever since the Great Recession, i.e., developers not overbuilding, tenants leasing space wisely and lenders being meticulous with their underwriting, and you have an environment that is still quite stable.

Economists also seem to think that, unlike the last recession, the next one won’t be catalyzed by the real estate industry, which is encouraging. In addition, some experts believe an inverted yield curve can be good for CRE because it encourages investors looking to preserve their yield to move out of the bond market and into real estate.

While trade wars and political uncertainty, particularly given the election next year, are making some investors wary, the fundamentals for real estate remain strong, which gives it a solid position in a growing number of investors’ portfolios.

GlobeSt.com: What do additional interest rate cuts mean for CRE?

Hooper: The low interest-rate environment has been a boon for commercial real estate, and further cuts would presumably continue to buoy the market. Some real estate strategists are of the mind that the country needs this type of easing to keep growth on track. A few possible outcomes of this easing are further yield compression especially in secondary markets, more borrowers seeking an increased amount of leverage since rates are so low, and a rise in investment activity in alternative sectors such as senior housing and student housing. Further interest rate cuts could add fuel to the fire and potentially drive up sale prices and valuations in an already heated market.

GlobeSt.com: What types of opportunities are available in this current market climate?

Hooper: There is still a great deal of demand for commercial properties among investors and tenants, particularly in the industrial sector. Supply remains constrained in both the industrial and office sectors despite ongoing demand and in many markets, the demand for multifamily properties provides an opportunity for those who seek it out.

Opportunity also lies in the rise of secondary and even tertiary markets. As many primary markets become overheated and yields compress, investors seek out new geographical areas to place their money, which has led to growth in markets like Pittsburgh; Raleigh, NC; Salt Lake City and Portland, OR, to name a few.

With Opportunity Zone legislation and the SEC considering broadening the definition of an accredited investor, opportunity in CRE continues to increase.  As long as investors keep market fundamentals, their own risk tolerance and the underlying strength of the asset they are considering in mind, they can uncover a wealth of opportunity in the very broad commercial real estate market.

GlobeSt.com: Anything else to add?

Hooper: It’s a very exciting time in our industry. With the economy still strong and so much dry powder, well-thought-out investment plays in commercial real estate stand a good chance of yielding positive results. Also, the continued rise of direct investment platforms are providing more transparency and data on investment properties than ever before. Barring any unforeseen macro-economic events, the market should remain on its positive course for some time.

Source: Globest



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