History has a mean habit of mocking us. Have any of you noticed the surprised looks on investors’ faces as commercial real estate prices begin to decline, as the air begins to seep out of the bubble? It’s as if the commercial real estate smackdown of the late 1980s was the result of divine provenance, not the very real consequence of a prolonged slump in the energy sector. Yes, we’ve been here. Yes, we’ve seen this.
The question is, what’s a regulator to do? Left to the devices of Boston Federal Reserve President Eric Rosengren, the resolute answer would be: “Tighten up!” To his credit, Rosengren has been sounding the warning bell on commercial real estate for years now. But the odds are his call for four more rate hikes this year will go unheeded.
If anything, his peers at the Fed have begun to lean the other way, backing away from their prior consensus call for three more interest rate increases this year. Chances are officials are unnerved by the message in the markets.
There’s no question the bond market has had the most pronounced market reaction to the failed attempt to replace and repeal Obamacare. The yield curve is the flattest it’s been since Election Day. In other words, short and long-term bond yields are trading at the closest yields to one another since the fall. The closer they get, the higher the risk of recession, a vexatious vision that falling real estate prices have begun to reflect. It really is as simple as that.
At least one debate can end. Commercial real estate and bonds had been running neck and neck for being the most overvalued asset class at risk of peaking and rolling over. Much to investors’ chagrin, there appears to be a winner.
For more on this, please enjoy my latest installment: Retailing in America: Game Theory in Reverse.
As always, wishing you well,