Hey All -
Obviously the market gives us a detailed picture of where they think rates are headed daily via the yield curves, fixed/floating swap rates, and etc.... But I wanted to get the groups thoughts/projections looking PAST this rapid run-up of rates to combat inflation, and start a bit of discussion regarding the true long-run stabilized fed-funds rate after this circus leaves town + the long-term impacts to our capital markets.
A few discussions points to kick us off...
-Was the QE era of interest rates & even lower COVID-era borrowing reflective of the market's additional education just how attractive MF/IND are from a risk/return POV, or just a beneficiary of low rates?
- Obviously we're coming off of all time low cap rates and record high rent growth... but let's break out the crystal ball and make some bad guesses about the future. Assuming the dot plot holds, inflation gets back under control, and Putin doesn't hit the red button... interest rates will glide back to 2.25-2.50%. Where do you think cap rates will settle (genral spreads, specific sectors, whatever your expertise) vs. the recent golden-era?
-Volatility = Opportunity. Any off the cuff guesses on long-term winners and losers on the buy-side with the rapid rise in rates? - I think nimble groups with patient capital will have some great opportunities to realize long-term value by acting on pricing corrections. Also, I think Pref/Mezz/B-Piece players just shook their desks because they stood up while sitting down
- Is what we are seeing truly inflation, or just supply chai.... I'm just kidding, this as a notice that the thread is meant to discuss the impacts of long-term "normal" interest rates on pricing, capital markets, structuring, and everything else in the CRE world.
Let's speculate purely on what our CRE world will look like assuming interest rates of 2.25%-2.50% exist in 2025 once all cools down.
Edit: While I hope this discussion will be beneficial for incoming analysts, I'd just ask that we keep the talking points and threads on-track between monkeys currently in the weeds actively underwriting deals and signing LOIs. Feel free to DM me with questions on lingo/nuances instead of disrupting comment threads
Two Hot Takes:
(Please prove me wrong)
- The days of abundant stabilized sub 4% cap multi deals (or even low-to-mid 4% cap multi deals) across secondary markets are gone. The market will begin to place much greater emphasis on product quality/vintage & micro location, continuing the bond-like progression the sector has already been seeing
- Industrial land in outlying/3rd-ring submarkets of MSAs will heavily curb the meteoric rise seen over the past 6-9 months, and that will be primarily due to a sharp decline in the pool of prospective buyers over the 1-2 years scared away by debt pricing. Long-term the fundamentals of tenant margins and rent levels are still good in most markets, even in the pricier infill locations, but liquidity in the capital markets will be the downer on overall pricing trends
One additional heater:
- All of the Beta Boys leveraging class-B apartments and office with floating rate loans will organize a Heaven's Gate-esque retreat in Aspen to avoid facing their investors... leading to an influx of true institutional middle-market investors taking over joker portfolios and landing high-quality foreign capital sources
Let's throw one more tongue-in-cheek heater in:
- Prologis begins to provide its own equity and debt for all new industrial acquisitions as it surpasses 25% ownership of the world's industrial square footage by 2025. Unique structuring and loopholes designed by the REITs legal team leave shareholders completely unaware that the C-suite's collective balance sheet is providing all of the below-market debt financing terms via a shadow bank while directly pocketing from interest payments + propagating that the financing scenarios from 2019-2021 are still viable.
Modi eligendi molestiae at. At unde repellat enim accusantium ut rem. Quia nulla quo labore reiciendis quia placeat.
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