January is typically a month for resolutions and looking ahead. But it’s remarkable to reflect back on the concerns that occupied the industry in 2019, when there was so much trepidation about the direction of the economy, interest rates and the political landscape.
Early in the year, the 10-Year Treasury had fallen to approximately 2.75 percent, down from its peak of 3.23% in October 2018. But the market continued to worry about the risk of rising rates and the impact that might have on transactional velocity, cap rates and valuations. The trade dispute with China and the investigation into Russia’s role in the last presidential election dominated the news. In mid-year, the yield curve inverted, and, combined with a decline in manufacturing and a slowdown in global growth, it looked as if the longest economic expansion in U.S. history had run its course. Recession obsession and market volatility were pervasive. And, in the third quarter the industry fretted about The Federal Housing Finance Agency’s multifamily loan purchase caps for Fannie Mae and Freddie Mac and had to deal with market disruption in the multifamily industry.
Whether your forecast for 2020 is exuberant or cautious, take advantage of the current environment to reassess and fortify your portfolio.
But what a difference a year makes! Interest rates have remained historically low following an intervention by the Federal Reserve. We now have a North American trade deal, an initial trade agreement with China and talks are ongoing relative to an even more mutually beneficial relationship. The FHFA announced new lending caps in October, bringing more clarity and stability to the multifamily market. And, in the meantime, employment and consumer spending remained strong, inflation stayed low, corporate profits were robust and the stock market rallied. By December, the mood had turned decidedly bullish.
As we consider the year ahead, there are many reasons for optimism. Debt and Equity from both domestic and foreign sources remains abundant. Lender pipelines coming into the first quarter are reported to be the strongest in some time. Yields on commercial real estate continue to compare favorably to other investment alternatives. And Mega-trends, such as Millennial household formation, an aging population and the surge in e-commerce, support continued growth in the multifamily and industrial sectors. By all accounts, 2020 is shaping up to be a good year for the market.
Of course, there are a few wild cards. Tensions are rising in the Middle East and global risks abound. The presidential election cycle will no doubt usher in a heightened sense of negativity – from both sides of the aisle – leading to uncertainty and market volatility. Federal retention rules could further impact mortgage securitization. And, there is no escaping the fact that we are indeed late in the economic cycle.
Whether your forecast for 2020 is exuberant or cautious, now is a great time to take advantage of the current environment, reduce your risk and fortify your portfolio. Consider how your assets would fare in a downturn and take steps to manage your risk. That might mean reducing overall leverage or refinancing existing loans to take advantage of attractive long-term debt options. All of us at Marcus & Millichap Capital Corporation wish you a happy and prosperous 2020.