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Fed Rate Indicator Signals Potential Cuts Amid Recession Worries
The gap between the Fed funds rate and the 2-year Treasury yield suggests a recession could be on the horizon.
Jordan B. & Han-Gwon Lung
September 11, 2024
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Good morning. On this day, we honor the lives lost and the heroes who rose on 9/11. Let’s reflect on the strength and unity that carried us forward.
Now, back to the news. Today, we're covering a key metric—the gap between the effective federal funds rate (EFFR) and the 2-year Treasury yield—a signal for rate cuts or possibly a looming recession.
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Market Snapshot
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Economic Uncertainty
Fed Rate Indicator Signals Potential Cuts Amid Recession Worries
The gap between the Fed funds rate and the 2-year Treasury yield suggests a recession could be on the horizon.
Warning signs: Barron's highlighted a notable difference between the effective federal funds rate (EFFR) and the 2-year Treasury yield as a new metric that signals possible trouble. With the EFFR at 5.33% and the 2-year yield at 3.68% on September 9, 2024, the -136 basis point gap is the largest since January 2008. While not an automatic recession indicator, it implies swift monetary policy changes ahead, similar to the 2008-2009 crisis response.
Recession risks: Data from the Federal Reserve Bank of St. Louis shows that every time the rate difference fell below -100 basis points since 1976, a recession followed within two to twelve months. This suggests that a downturn could be on the way, though Barron’s notes this is not yet a balance sheet recession, as public debt remains low and asset prices have not plummeted—at least not across the board.
Mounting pressure: While the broader economy may not yet be suffering from debt and asset imbalances, commercial real estate is feeling the pinch. Many CRE owners are grappling with heavy debt and declining property valuations. Rising operating costs and tightening liquidity could exacerbate these issues.
Will it be enough? RXR CEO Scott Rechler recently warned that the Fed will unlikely cut rates enough to bail out the CRE industry. Speaking with Bloomberg, Rechler said that higher rates may be the new normal, forcing a multi-year recalibration in property valuations and financing structures.
➥ THE TAKEAWAY
Looking ahead: The gap between the Fed funds rate and the 2-year Treasury signals looming challenges, particularly for property owners, with no clear Fed rescue in sight. With Treasury yields dropping ahead of key inflation data, the market awaits the Fed’s next move as speculation grows over the potential size of upcoming rate cuts.
With recession signals flashing and the gap between the Fed funds rate and 2-year Treasury yield widening, do you think it’s too late for the Fed to prevent a significant downturn? |
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✍️ Editor’s Picks
Silverstein's triumph: Larry Silverstein reflects on the honor of rebuilding the World Trade Center for 20 years, with 5 of 7 towers done and 95% leased.
Debt dips lead to deals: CRE debt origination in the first half of 2024 fell by a modest 4.5% YoY, with some believing we may be at the bottom. Meanwhile, industrial originations rose 28%.
Crystal ball: Brookfield Asset Management (BN) sees a recovery on the horizon for the embattled CRE market as inflation eases and debt markets open, offering new opportunities.
Silver screen slowdown: Hudson Pacific Properties (HPP) has suspended its dividend due to the slow recovery in studio demand following Hollywood’s strikes.
Trending upward: Green Street's Commercial Property Price Index rose 1.6% in August and is up a respectable 3.3% this year, yet is still down nearly 20% from its 2022 peak.
🏘️ MULTIFAMILY
Housing hopes and hurdles: Hamptons restaurants are proposing an $850K per unit employer-sponsored apartments amid the area’s housing crisis.
Big, bold initiative: Guggenheim Securities plans to leverage Fannie (FNMA) and Freddie (FMCC) to create a secondary market for construction loans, aiming to build millions of homes.
Mortgage maven: Diana Reid became Freddie Mac's (FMCC) new CEO, succeeding interim CEO Michael Hutchins, and promises to enhance housing stability and affordability nationwide.
Residential realities: A recent study reveals a 4.3% national unemployment rate, a decline in housing starts, and elevated borrowing costs—all of which impact the residential market.
Deal flow delight: Yardi Matrix's August 2024 report predicts increasing multifamily deal flow due to lower borrowing rates, which has fostered a sense of "moderate optimism."
Developing dilemma: Miami developer Acre gained approval for a 337-unit apartment project in the Legion Memorial Park area, sparking controversy by promising not to use the Live Local Act.
🏭 Industrial
Manufacturing frenzy: Nationwide, US manufacturing investments are surging, boosting Sunbelt and Rust Belt demand.
Logistics lair: DECA, Wildcat Capital secured a $135M construction loan for the upcoming Perris Gateway warehouse.
Vault distribution: Lunada Rose Partners acquired Houston's Vault Distribution Center, a 185.4 KSF industrial property fully leased to Empire Auto Parts, for around $21.9M.
🏬 RETAIL
Grocery wars: A joint venture partnership including ShopOne Centers REIT and Pantheon just acquired two Florida grocery centers with strong sales and foot traffic.
Retail rebound: The retail market in DC is getting ready for a strong rebound, with vacancy rates hitting a 5-year low, and 950 KSF of absorption projected.
Reviving St. Elmo: Sutton Company will lead a $300M mixed-use development at the former Hill's Cafe in Austin.
Fresh start: Red Lobster (DRI) plans to emerge from Chapter 11 bankruptcy with 544 locations remaining in the US and Canada after slimming down from 650.
🏢 OFFICE
Can’t stay away: Bridgewater Associates is nearing a deal to lease its first NYC office at 295 Fifth Ave, marking an expansion beyond its Connecticut headquarters.
Successful pivot: A Houston office building sold for $10.5M, or around $77 PSF, as part of Silver Star Properties' asset liquidation strategy in its pivot to the self-storage sector.
Debt to equity: Beacon Capital and 3Edgewood acquire a majority stake in $484.8M debt on the Pacific Corporate Towers in El Segundo, CA.
🏨 HOSPITALITY
Small but still mighty: The Los Angeles hotel market is shifting to smaller properties with 6% fewer sales and a 79% drop in total dollar volume.
Switching tactics: Brooklyn-based Pro-H Development purchased the shafted AC Hotel NoMad site for $30M and is now planning to build residential condos there instead.
📈 CHART OF THE DAY
Oxford Economics predicts a 947,000 decline in U.S. young adults over the next decade, but states like Texas, Florida, Arizona, and Utah will see growth.
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