Reading economic tea leaves has never been an exact science, but it has become even more opaque of late.
We like to think that we are pretty dialed in on the economic metrics that drive trends in the commercial real estate industry, but we remain perplexed as to why the huge run-up in interest rates hasn’t had a significant impact on pricing. So far, higher capital cost has managed to slow transaction velocity and put an end to the big price increases we experienced for over a decade. But, pricing has been largely unaffected.
If you follow these pages regularly, you’ve heard us talk about this before, and just a month and a half ago we issued another warning that another sudden spike in interest rates was finally scaring enough buyers away to change the pricing trajectory.
That was mainly due to persistent inflation that has kept the Fed’s foot on the brakes and an unexpected major increase in the yield on the 10-Year US Treasury note, the benchmark upon which most commercial mortgage rates are based. It shot up 90 basis points in six weeks to 5% on October 23th, a level not seen since the early 2000’s. That sent commercial property mortgage rates, including for the SBA 504 loan widely utilized by owner/user buyers, above 7% for the first time in decades.
We thought that may turn out to be the straw the broke the camel’s back on pricing. But, in the ensuing six weeks, the yield on the 10-Year note fell just as fast as it had risen, shedding 80+ basis points to the 4.15% range where it stands today. Nobody seems to know what the wild swing was all about, but we can tell you with confidence that the lower that yield is, the lower mortgage rates for industrial buildings will be.
On December 8th the SBA 504 rate plunged 41 basis points to 6.59%. That’s really good news for buyers and may bring more sellers to the market to capitalize on the likelihood of resurgent demand. It also protects current pricing levels, further delaying a significant correction. And, it makes more of a case for a soft economic landing, especially if inflation continues to moderate in the coming months.
Does this mean we are out of danger of a major market correction? The answer is no. But, it does improve our odds and the market momentum we are likely to get in terms of borrower demand buys time for the Fed to keep the economy on a glide slope that won’t tear the gear off the plane when it hits the runway.