REAL ESTATE NEWS

The risk of a recession in the next year appears to be rising as the most recent jobs report suggests a weakening U.S economy. However, a silver lining lies ahead for CRE investors, according to John Chang, chief intelligence and analytics officer at Marcus & Millichap.

The slower job growth rate in August and the downward revision of previous months’ job figures are likely to prompt the Federal Reserve to cut rates today, as half of its dual mandate is to support the labor market. Investors are speculating the Fed may implement a 50 basis point cut this month, with further reductions later this year that could bring the overnight rate down to about 3.5%. That speculation has put downward pressure on the longer-term rates like the 10-year Treasury, which has fallen to about 4%.

“That is an important milestone,” said Chang. “I can't tell you how many investors have told me that 4% is the magic number.”

At that rate, more for-sale properties will become more attractive to investors as lower rates push more assets into positive leveraged territory. That could lead to increases in deal flow and transactional liquidity as long as financing costs remain contained, according to Chang.

The window of opportunity may be brief, however. Rates have come down and lender spreads have yet to widen, which has resulted in agency financing on multifamily assets falling to the low 5% range for strong buyers. For commercial properties, lending may be as low as the mid-5% range, depending on the strength of the borrower and the individual asset.

“Given the 80 to 130 basis point rise of average cap rates over the last few years, a lot more transactions could finally pencil,” said Chang.

He cautioned that just because the cost of capital has come down somewhat, that doesn’t mean property values will climb or that cap rates will fall. It does signal that well-priced assets will have a higher likelihood of clearing the market.

A great deal of uncertainty remains around trade policy and employment, which will continue to create headwinds that will make investor decision-making challenging, especially in the short term. However, the long-term outlook remains positive as CRE development is likely to continue to shrink, which should favorably shape the overall supply and demand outlook, according to Chang.

“That should bolster long-term occupancy trends across the entire commercial real estate sector,” he said.

Source: GlobeSt/ALM