However, the desired results may require more than prediction.
All praise to Prologis. If anyone knows industrial, logistics and supply chain real estate markets, then they know. And they have a number of “bold predictions” for the supply chain in 2024, two of which are financial. Optimistic and courageous are fine, but are best when paired with proper risk management (which Prologis probably uses regularly in its business decisions).
One of the two financial forecasts is that falling interest rates will double private equity real estate financing. They base this on three factors. One is the assumption that the Fed is underestimating the decline in inflation.
“Our forecasts are based on rate cuts,” they wrote. “While the latest forecasts from Federal Open Market Committee members in December show a median federal funds rate in the mid-range of 4% in 2024, below the mid-range of 5% in 2023, we expect the Inflation will slow faster than expected.” Could be. Or it could be that inflation only declines after a short period of time. The correct naming of this factor has confused many experts and market observers.
The second part of their argument is that the 10-year Treasury yield would “fall below 4% in 2024, above consensus expectations of about 4%.” A look at the Treasury data feed shows that the 10-year Bond has been below 4% for about two weeks. Would that be a break-in? Sure, but we still have to wait and see what happens next year.
It would also be good to consider what billionaire bond trader Jeffrey Gundlach predicted that a A 10-year return of less than 4% sounds “almost like a fire alarm” This could be a sign of a recession.
Prologis also pointed to large amounts of “dry powder” on the sidelines, with “interest rates falling in the second half of the year.” [that] will enable market entry when the capital market cycle begins to turn.” Again, perhaps. Perhaps the supply chain is unusual in this regard, but experts spoke to GlobeSt.com about the ready capital that was waiting for them. Would cutting interest rates by a total of 75 basis points become such an urgent need?
The question focuses on the 10 year. If the value falls sufficiently, investors may begin searching for yield and conclude that alternative investments are necessary again. But if 2023 was unconvincing with a federal funds rate of 5.4 to 5.6, the 4.6 to 5.4 for 2024 is convincing if investors think the 3.4 to forecast for 2025 is convincing 4.9% might seem better?
The second general financial forecast for commercial real estate assumed that capitalization rates would reverse. “Yield spreads between Western and Asian markets widened from a low of negative 50 basis points in early 2022 to 130 basis points in the third quarter of 2023, above the average of 30 basis points in 2019,” they wrote. They also again pointed to a fall in the cost of capital in the US and an increase in Japan.
Part of their rationale may also lie in the impact of a flood of capital into commercial real estate in the US, driving up prices and driving down capitalization rates. But there is also a desire to make a good deal – to look for distressed assets. Wait for the better offer. The question is whether it is practical at this point to seek large rent increases, which are often necessary for a deal to support falling cap rates. No matter whether, especially in the case of industrial real estate, the demands on the supply chain increase the need for more real estate or whether there is a reduction in pressure in the form of bottlenecks in the supply chain.
It's unlikely anyone knows the answers. This may be a form of scenario planning without mentioning the likely or negative deviations. But just as smart planning means not assuming everything will be okay, it also requires recognizing that it just might be.
Comments are closed.