When determining their strategies, commercial real estate investors monitor a variety of factors, including market performance, asset value, and rates of return. John Chang, senior vice president with Marcus & Millichap, also indicated that investors should monitor these four macroeconomic issues.
#1—Inflation
Chang noted that:
- February’s Consumer Price Index came in at 2.4%
- During the same period, the Producer Price Index stood at 3.4%
- The Personal Consumption Index was 2.8% in January
However, “all of these readings are from before the Middle East conflict, before oil prices skyrocketed,” Chang said. “It’s broadly believed that rising energy costs will put upward pressure on inflation in the coming months.”
#2—Federal Reserve Actions
At its most recent Federal Open Market Committee meeting, the Fed decided to keep the federal funds rate at the 3.5% to 3.75% range. The reasons included elevated inflation, a slower labor market and growing uncertainty about energy costs.
Chang pointed out that the “probability of a rate cut in June has dropped below 10% and even a rate cut by the end of the year has become questionable.” Much will depend on how long the Middle East conflict lasts and the resulting inflationary pressures.
#3—Treasury Rates
Since late February, the five-year Treasury has increased by 35 basis points (bps). The 10-year Treasury is up by approximately 30 bps. The metrics support the view that the Fed might not reduce rates as much as originally thought.
“The good news is that despite the recent bump, the 10-year rates still appear range-bound in the 4.0% to 4.5% range,” Chang said.
#4—Lender Spreads
Another piece of good news is that so far, lenders continue to keep their spreads fairly tight, while “the availability of lending capital remains plentiful,” Chang said.
This means that interest rates, in general, have been in the low- to mid-6% range, while multifamily agency financing is hovering in the low 5% range. Chang added that rates depend on other factors, including asset type, location, quality, and borrower strength.
The Takeaway
Chang said that while investors need to be tuned into volatility and short-term risk, they should also examine the big picture. The stock market volatility index is still elevated.
Additionally, “if inflation remains persistent and elevated, commercial real estate offers some inflation resistance,” as well as a comparatively stable outlook, Chang said.
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