The commercial real estate market is wobbling, and market veteran Ed Yardeni thinks it will help get the central bank to stop hiking rates.
Bond yields have jumped in recent months, making the cost of borrowing money far more expensive than businesses have been used to. That isn’t helping a commercial real estate market already plagued by office vacancies, heavy refinancing needs, and a credit squeeze after the March bank failures.
“There’s going to be a lot of things breaking in the commercial real estate market,” Yardeni, president of Yardeni Research, told Bloomberg TV on Friday. “I think it’s one of the reasons the Fed is probably done raising interest rates because they realize the bond market has been recently doing all the heavy lifting in monetary policy.”
Indeed, several Fed officials have expressed a similar view in recent weeks, raising expectations that the central bank will keep rates steady at its policy meeting next month.
Yields on the 10-year Treasury recently hit a 16-year high and are currently sitting at 4.68%, after touching 4.9% earlier this month.
“With the bond yield up close to 5%, that’s a disaster for all the commercial real estate deals that have to be refinanced, or the value of commercial real estate.”
The commercial real estate sector has been in a prolonged rut, unable to shake off the suppressed demand since the pandemic as work-from-home policies remain. Across the country, office loan delinquency rates have been rising while higher rates have been battering US companies that now face larger costs to refinance any debt.
But while the current malaise in the industry reminds Yardeni of an earlier crash, he remains staunchly in the “soft landing” camp.
“Those things are going to break, very reminiscent of what happened in the early 1990s when we had the [savings and loan] crisis,” Yardeni said. “A lot of things broke in the commercial real estate market. We did have a recession back then but it was really mild.”
