What happens to real estate if we go to war?

It is fair to say that war, unto itself, rarely has a direct impact on commercial real estate. Instead, wartime activities can cause instability in the marketplace, drumming up economic fear (perceived and real) that can have follow-on effects as it pertains to commercial real estate.

gowercrowd.com - The Impact of War on Commercial Real Estate - GowerCrowd

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Adam Gower: So, rising interest rates. Let's talk about that, just for a moment. 25 basis points, but another 6 of them this year, projected. So now we're talking about 150 basis points against... Is that right?

John Chang: 175.

John Chang: One, plus six more.

Adam Gower: Right. One plus six more, exactly. You know what they say? There are two types of real estate, three types of real estate professional, those that can count and those that can't. 1.75%. That's enormous. I mean, that's doubling. Over doubling what the basis is now. So, it only seems very small because it's only 25 basis points. But, as a multiple of what there is right now, it's absolutely ginormous. What do you think the impact of that could be on commercial real estate when there's so much activity and so much liquidity in the market and there has been up until now. John Chang: Yes, absolutely. First of all, it's 175 if they're all 25 basis point increases. John Chang: Some of them could be 50s. Right? So it's going to be at least 175. And right now, the 10-year Treasury is just over 2%, 2.1, 2.2, depending on the day and the time. So, yeah, we could be doubling the interest rates over the course of the year. Now, the Fed is responding to the highest inflation we've seen in 40 years. It's far more entrenched than they had originally broadcast. They kept saying transient, transient, transient. And then they decided that transient probably wasn't correct. And now they're still saying that they think the inflation is going to go away by the second half of this year. Are going to come down dramatically. I really question that personally. But, what is the effect of raising rates at least 175 basis points? We recently did a survey of investors and we said, okay, if interest rates go up by 50 basis points, are you going to change your buying activity? And really, at 50 basis points, very few people cared. I think it was about 6% said, yeah, I'll reduce my purchasing. We said, okay, what about if it's 100 basis points? And then 19% said, yeah, I would probably reduce it. But again, in the global perspective, that's not very big. Once you get to 150 basis points. Now it tipped. 46% - almost half of the buyers out there say, yeah, I'm going to slow it down. So, we know that somewhere around 150 basis points is the trigger point - is the tipping point in investor activity. John Chang: And so, by the end of this year, we may be at that point. Now, there is a ton of capital. Real estate - it tends to be a pretty good inflation hedge. Real estate is a good place to park capital during times of uncertainty. It is a good place to park capital when there's volatility. So, you have these two forces that are battling. On one hand, you have very low cap rates. Interest rates rise, you get a yield compression and actually, you could end up upside down in your first year of operations, depending on your cost of capital and how much leverage you use. So, this is on one side. On the other side is, it's really one of the best places to put your capital. So, I anticipate the first half of this year is going to be very active, very strong. We see a lot of activity because it's going to take time for the Fed to move those rates up and they're not going to do it all in one fell swoop. They're going to do it, a little bit at a time, every couple of months. They're going to hit it again and again and again. And so, by the end of the year, this will likely see a slowdown. Now, there's a lot of moving parts in there, right? If inflation is still high, if we see more uncertainty in the stock market, we see money coming out of the stock market, some of that's going to go into real estate. So it could honestly go either way.

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gowercrowd.com - The Impact of War on Commercial Real Estate - GowerCrowd

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