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This week on the CRE Capital Markets Report with Thirty Capital, the team of analysts explores the combination of an improving economy, and increasing inflation, and a fragile commercial real estate market.
Analyst Bryan Kern highlights strong economic data, with an unexpected increase in retail sales and a strong GDP forecasted for 2021. A decrease in jobless claims numbers since the start of the COVID-19 pandemic in early 2020 added to the good news.
However, Bryan notes that last week also saw the 10-year Treasury drop by about 10 basis points, probably pointing to the fact that the Federal Reserve isn’t planning on responding to increasing inflation anytime soon.
This is partly due to the fact that no other major economy has attractive yields. So fixed income investors took advantage of a spike up to about 1.72% on the ten year. Bryan predicts that investors and consumers can expect minimal volatility or rate changes in the near future.
Thirty Capital’s CEO Rob Finlay points out that the big commercial market alert last week led to many consumers selecting floating rates instead of fixed rates on loans, even though fixed rate is currently inexpensive. A two-per-cent 10 year Treasury rate is possible by the end of the year.
However, Rob notes that in spite of the bright economic outlook, the picture for commercial real estate is uncertain. He doesn’t foresee workers returning to officers anytime this year, so there’ll be no increasing footprint in commercial real estate.
Explains Rob: “People still aren't paying their mortgages and people still aren't getting kicked out of apartments. The real estate market is really going to be very fragile. So I think, quite frankly, people are liking floating rate loans because they can really get dinged hard on a fixed-rate loan.”
Going forward, the economy is expected to experience massive growth in 2020, with predictions for GDP at around seven percent in Q1, ten percent in Q2, and well over five percent for the remainder of the year.
Analyst Jay Saunders points to historic trends, especially the period right after the Great Recession. “Everyone's trying to figure out the Fed at the moment. That's clearly the only game in town - who's buying bonds. They're going to let the rates run for a long time for the foreseeable future.”
Analyst Jason Kelley sees rates moving a little bit higher, but not taking off. I don’t see the old days of three and fours. There is going to be some pressure to move up with the short-term inflation. But I think we're going to hit a plateau once we get there.”
The team analyses and shares their views on:
- What actions the Feds may take on rates in 2021
- The likely potential for low floating rates for a long time to come
- Whether borrowers should be looking for floating-rate deals
- What kind of rate deals may appeal to borrows seeking a longer-term loan
- The potential for most consumers to select floating rates over fixed in the foreseeable future.
- Despite the lack of volatility, market conditions will be very interesting for some time to come.