Navigating Volatility in the Near-Term

Statistically, long-term real estate investments ride out short-term market fluctuations.

Navigating Volatility in the Near-Term

On July 31, the Federal Reserve lowered benchmark interest rates by 25 basis points in an effort to extend the U.S. economic expansion, setting the target range for the federal funds rate at 2.0 to 2.25 percent. Unfortunately, the markets took a negative view of Fed Chairman Powell’s commentary following the rate cut, and stocks sank.

A day later, concerns over the U.S.-China trade war escalated as President Trump placed new 10 percent tariffs on $300 billion worth of Chinese goods and China retaliated by allowing its currency to depreciate to the lowest level since 2008. The uncertainty and anxiety created by this series of events triggered a selloff in the stock market and a flight to safety in bonds. As a result, the yield on the 10-year U.S. Treasury has been trending downward all month hitting a low of 1.52% on August 15. Further, we witnessed an official inversion of the yield curve, a signal of a potential recession.

In a volatile environment, it is important to carefully evaluate the amount of leverage on each asset and stagger loan maturities.

According to Marcus & Millichap Capital Corporations' research team, the current equity market volatility is likely to linger in the near-term as trade talks resume and the market digests mixed economic signals. There are clear signs that manufacturing activity is slowing, global growth is deteriorating, and a stronger dollar could weaken exports. The impact of the U.S.-China trade war on the overall economy is real. On the other hand, the unemployment rate remains near a 50-year low, corporate earnings are solid and consumer confidence is high. And the administration still has other levers it can pull to support the growing economy.

In this volatile environment, owners and investors should work with their mortgage bankers to evaluate their entire portfolios, and get their assets appropriately positioned for a potential downturn in the economy. Rates are remarkably low, and capital is abundant.

This is an optimum time to refinance into loans with extended lengths, lower rates and non-recourse terms. It is also important to carefully evaluate the amount of leverage on each asset and stagger maturities to diversify your maturity risk. Though we hope the economy will continue its impressive historic expansion, these best practices should pay dividends even if a recession occurs within the next 12-18 months.

In Summary:

Now is an opportune time in the commercial real estate market. Whether you're buying or selling investment properties, it's essential to look closely at the terms and leverage (LTV) of financing. It's also well worth reevaluating your in-place financing, on all real estate assets, to take advantage of the low rates and abundant capital, while at the same time positioning your portfolio to perform well even if there is a downturn in the market.

If you're a New Jersey property owner, you should strongly consider getting a Market Positioning and Pricing Analysis for your property, or simply get a re/financing quote from one of Marcus & Millichap's in-house financing specialists. Contact me at 201.742.6177 or chez.eider@marcusmillichap.com to discuss further.

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