Real Estate Capital Scoreboard® – January, 2019

Chicago, Illinois, January 1, 2019 – As the year begins, high volatility and uncertainty are buzzwords for real estate capital markets. The Fed’s interest rate hike in December was the fourth of the year, and the ninth upward adjustment since 2015. Ironically, five and ten-year benchmark treasuries are about the same as the end of last January, but short-term indices — mainly Prime — are about a full percent higher. However, the most significant news focuses on continuously plummeting rates as witnessed last month, a movement of about 30 basis points downward for benchmark treasuries. These movements reflect extreme uncertainly in the stock market, assuring that mortgage rates will be under pressure to remain at currently low levels for the near future.

Lenders maintain strict underwriting standards, as regulators actively monitor the banking sector, the agencies and other traditional financial institutions. Unregulated debt funds dominate higher risk/leverage offerings, but also must target competitive yields in an oversupplied capital environment. In summary, the overall debt community will predictably perform within tight yield expectations, rather than taking on higher risk ventures.

For now, expectations of permanent rate stability help sellers maintain favorable pricing levels in the realty equity markets. Buyers, on the other hand, are increasingly more cautious and selective – especially in the luxury multifamily property sector, as new supply floods markets.

Some other quick predictions for 2019:

Suburbia Rebounds: Watch as more suburban acquisitions make headlines. With urban core markets gaining the most attention, suburban properties in nearly all sectors (except industrial) enjoy renewed buyer interest due to larger pricing gaps.

Price Discovery: This year will feature more pricing “discovery” than in the recent past, since more buyers are fleeing to attractively-priced stocks and bonds. Naturally, less buyers at the table means lower prices.

Higher Rates: As the cost of borrowing rises, markets will re-price assets accordingly and gradually. The domestic economy is on a steady course. So don’t expect any dramatic changes, unless global events significantly alter market stability.

Mr. John Oharenko, director of The Real Estate Capital Institute®, emphasizes, “2019 is starting with a loud bang as short and long-term rates continue converging, the classic signs of a market correction. That said, it doesn’t feel like it will be painful as the economy keeps humming along and real estate fundamentals are generally solid.”

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