Although it's early, there are clearly signs stagflation is a real possibility. This would likely turn the idea of a what an appropriate cap rate would be completely upside down. The cure, and how the FED would handle, is a complete unknown, other than looking historically and seeing insane interest rate hikes.
Interested to hear what other people think could happen if this plays out.
The only way to cure stagflation is to remove the deflationary drivers from the economy. You need real productivity gains. The issue we have is that we have papered over piss poor productivity gains in the real economy with QE and phony technology improvements since 2008.
Edit: Don't even get me started on the dislocation that has existed in the eurodollar market since 2006.
Edit 2: Missed the part about the impact on RE. It is hard to say exactly. There aren't many good data sources on this given that we haven't had an official stagflation designation outside of Japan from 1980s - 2022 and a few years in the 1970s in the USA. One was driven by excessive QE and the other by lack of correction as the global economic conditions shifted the production winds.
Please do lol, if you cant direct me to some resources that discuss it, I've always been very curious about the eurodollar market.
Here is a pretty good overview source.
https://www.youtube.com/@eurodollaruniversity
who knows. One thing for sure, sectors with inflation-hedge mechanisms, like multifamily, is going to garner more investor interest during these times than others.
You'd see more realistic valuations to be honest. Post GFC appraisal practice has really moved away from a true understanding of underlying market fundamentals.
Agreed. Appraisal business is a joke. They either miss the forest for the trees or they just do whatever the lenders want them to do to justify valuations.
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It's hard for me to look out onto the horizon and not see productivity gains. Whatever you think about AI, robotic technology, etc., I just wouldn't want to be making the bet that we aren't going to see productivity gains over the next 5-10 years. I have slowly warmed to the Peter Zeihan concept (despite disagreeing with him on a good many things) that onshoring combined with a large percentage of the labor force in advanced economies aging into retirement is going to create inflation. I don't agree with him about *how* high inflation will be, but inflation rates between 3-5% over the next decade could certainly happen. And if you believe that, then the long-term Fed funds will need to be in that range to be interest rate neutral, which means that long-term borrowing costs would be in the 5-9% range. I would also add that if you look at the longer-dated Treasury yields, the market consensus appears to validate this.
Over time, I'd expect that moving manufacturing capabilities back to North America to be cost effective (or neutral at worst), but in the near-term, we have a lot of production capacity that needs to be rebuilt in the US or built in places like Mexico. Different from that, but a similar theme, China labor inputs have and will continue to increase over time, and that production as a result is either more expensive or needs to be replaced elsewhere (which comes at a cost).
So, what I could see is a more persistent level of inflation than what we've seen over the past 35 years, leading to higher rate levels, but productivity not suffering. And of course, this all goes without saying that I am the furthest thing from an economist and will likely be wrong about everything.
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