What Yield Curve Inversion Means for CRE Markets

3-Month Treasury Yield Rises Above The 10-Year

• The 3-month and 10-year treasury yield curve inverted last week, signaling heightened risk of an impending recession
• An inverted yield curve is not a foolproof indicator. A recession followed 8 of the last 10 inversions

Expectations Point Toward A Mild Downturn If One Occurs

• Economists continue to forecast very mild decreases in economic growth for the first two quarters of 2023
• The most significant factor influencing recession risk has been hawkish Federal Reserve policy in response to elevated inflation

CRE Investors Should Keep Long-Term Outcomes In Mind

• Intense media discussion of downside risk can weigh on investor sentiment, often pushing investors to the sidelines, but downturns are followed by growth that generally lifts CRE performance
• The weakened short-term economic outlook offers investors an opportunity to calibrate their strategies to capitalize on the next expansion cycle

*Through October 27
Sources: Marcus & Millichap Research Services, Federal Reserve

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How Investors Can Capitalize on Periods of Rising Uncertainty

Economic Headwinds Grow

• The Fed maintains aggressive posturing in its fight against inflation, fueling heightened recessionary fears
• Recessionary risk drives uncertainty, pushing some investors to the sidelines

What Can We Learn From Prior Periods of Uncertainty

• Recessions do not impact all metros and property types the same; The dot-com burst in 2000 hit some markets hard while others achieved substantial growth
• During COVID-19, Investors delayed purchases to wait for a wave of distressed assets that never materialized

How Investors Can Find Opportunities In The Current Market

• Periods of high uncertainty can bring rarely traded assets to the market, creating unique acquisitions for CRE investors
• Investors can reposition portfolios to better align with future market trends and demographic shifts

*Through October 19
Sources: Marcus & Millichap Research Services, Federal Reserve

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What The Plummeting Euro Means For U.S. CRE Investors

European Economy Faces Uncertainty

• Recession fears are growing in Europe, with Eurozone inflation at 9.1%
• Russian oil and gas imports are down 35% and 73% respectively, dampening Europe’s productivity

USD Records Surge in Value Relative to the Euro

• The Euro-Dollar exchange rate has been falling rapidly, hovering near $1 since summer 2022
• As a result, European and global investors are shifting funds into dollar denominated assets, like U.S. CRE

U.S. CRE Viewed As a Safe Bet For Global Investors

• U.S. CRE is seen as a more stable investment during periods of global economic uncertainty
• Since 2003, European investors have increased capital investments into U.S. CRE by an average of 15% in years when the Euro fell against the U.S. Dollar

*Through 3Q
Sources: Marcus & Millichap Research Services, ECB

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What To Expect Following The Release of New Labor Data

Near Term Hurdles

• The Fed’s commitment to slowing inflation is beginning to weigh on the economy
• The Fed is expected to raise the overnight rate by another 75-basis points at the November 2nd Fed meeting

Effect on the Economy

• Unemployment remains low at 3.7%, but reduced job openings suggests labor market loosening
• Other indicators like the ISM manufacturing index are still in positive territory, but are beginning to weaken

Impact on CRE

• Rising uncertainty may weigh on investor sentiment
• Investors must consider longer-term horizons when crafting there CRE strategies moving forward

*Through August
Sources: Marcus & Millichap Research Services, BLS

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CRE Delivers Durable Returns Over the Long-Run

CRE Outshines Alternatives

• Economic volatility and near-term uncertainty are weighing on the broader investment outlook
• CRE’s has historically delivered comparably low volatility, and sturdy performance

How CRE Compares to the Stock Market

• CRE yields have been relatively stable over the last two decades
• While the stock market is down 24% so far this year, CRE has sustained momentum

Favorable Characteristics of CRE

• Underlying demand drivers remain sound, providing some insulation against wider economic turbulence
• As a hard asset, CRE offers some inflation resistance
• Investors favor CRE cash flows and the range of financing options

*Estimate through September 28
Wilshire 5000 Total Market Full Cap Index used for stock market capitalization
Commercial real estate total return includes apartment, retail, office, and industrial properties $1 million and greater; includes non-leveraged weighted average returns on property price appreciation and cumulative cash flow; S&P 500 total return based on price index appreciation and cumulative dividends (dividends not re-invested)
Sources: Marcus & Millichap Research Services, Wilshire Associates, BEA, National Bureau of Economic Research, Moody’s Analytics

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