One year ago, the Fed was in firmly hawkish territory, having seen eight interest rate rises over the preceding two years. Other major central banks were also giving hawkish signals and the markets were a-chatter with a global recession, potentially in a matter of months.
One year and 138 central bank rate cuts later*, Norway remains the only G10 country to still be hiking interest rates. Softening global conditions, stubbornly low inflation and geopolitical headwinds, amongst other factors, are driving this dovish monetary stance on a global scale. The extent of this change in thinking can be seen by the Fed who last week cut rates for the third time this year, to 1.50-1.75. The combination of these cuts has changed the shorter end of the US yield curve, dissolving the inversions that have been making some market commentators nervous for a recession.
However, while global recessionary signals have somewhat abated, with interest rate cuts and quantitative easing already back on the agenda, we have fewer remaining tools to hand, should an unknown factor knock us into a negative growth environment.
But what does this mean for property?
Across asset classes, including commercial real estate, returns are lower than they used to be and a lower for longer macroeconomic climate means this is unlikely to change anytime soon. In this environment, commercial real estate is seen by many investors as providing an income relative to bonds and reduced volatility (albeit with an illiquidity premium), relative to equity. Resultantly, we are seeing activity by investors such as pension funds and insurance companies into commercial real estate, which have potential to provide income and liability matching in a way that (negative yielding) bonds are unable to.
Some investors are now re-aligning their expectations to this new lower for longer reality and accepting lower returns on commercial real estate. Other investors seeking enhanced return are, for example, investing in locations that benefit from two of the remaining tools that can spur growth; innovation and education. Such locations include cities with strong education links, which are successfully monetising innovation. Investors are also considering asset classes that benefit from long term / demographic changes, such as in the specialist sector, which enable them to move up the risk curve, while potentially offering some downside protection, should there be an economic shock.
Take a look at our Active Capital research to see our take in more detail.