The three-month/10-Year Treasury yield curve has inverted, with the three-month Treasury closing last Tuesday at 4.14% and the 10-year closing at 4.10%. So does that mean a recession is imminent? And if so, will it be worse than expected?
Maybe, and it depends, says Marcus & Millichap’s John Chang.
“There may be another shoe to drop,” he said in a new research video. “A lot will depend on the Federal Reserve,” which is meeting this week to discuss further hikes to the overnight rate.
A yield curve inversion happens when short-term Treasury rates pay a higher interest rate than long-term Treasuries. Other economists, like JLL’s Ryan Severino, has said that such an inversion “has typically preceded economic downturns and therefore is taken as a warning sign.”
“Some economists think the 3 month-10 year is the gold standard [as an inflation sign],” Severino told GlobeSt in late October. “Other economists look at other inversions. Some look at multiple. But none will take this as a positive sign.”
Other experts warn that valuations could take a hit.
“Cost of debt for real estate has gone from the mid-3% level at the beginning of the year to more like 5.5% to 6% today and there’s capital rationing happening across the debt markets,” Uma Moriarity, senior investment strategy analyst and global ESG lead of CenterSquare Investment Management, told GlobeSt in a preview interview. “REITs have effectively already priced in the impact of the changing reality of debt costs. That price correction has not happened in the private markets yet, and we anticipate that is coming in the next 12 months.”
But despite that, Chang says opportunity abounds for commercial real estate investors.
“I want to encourage investors to not get too focused on the inverted yield curve or the recession risk that may be out there,” Chang says. “If the recession is as mild as most economists think it will be…then commercial real estate will be a very well-positioned asset to weather the brief, mild storm. Don’t forget, after every recession there’s a recovery cycle and a growth cycle. and when there’s growth, CRE tends to do very well.”
Chang says “the real focus shouldn’t be on the next few quarters,” adding that “investors should be thinking about what the recovery and growth cycles following the next few quarters could look like.”