While the gyrations of the market certainly have been disturbing over the last week, it remains unclear whether or not the current state of things can be compared to 2008.
One of the more interesting developments was the downgrade of the United States’ AAA credit rating by S&P last Friday. What is very telling about the downgrade is how the markets have reacted to it. While the markets spiraled, people went to Treasuries as a safe haven which drove yields down, rather than producing an expected spike. Also, yesterday the Fed came out and indicated that they wouldn’t be touching rates till mid-2013. As a result, banks will continue to have a borrowing rate near zero.
On the surface this environment may seem encouraging for those looking to borrow money, since Treasury yields and the discount rate are low. It doesn’t necessarily mean that corporate America will see the benefits reflected in the cost of their borrowing, however. Back in 2008, we saw a very similar trend. People flocked to Treasuries driving yields way down, but at the same time borrowing costs skyrocketed and credit became very difficult to obtain.
It will be interesting to watch how things develop during the next couple of weeks. Quite possibly, the lower on the credit spectrum you are, the more likely it is that your borrowing costs are going to spike. In a sense, that’s making a very obvious statement. There is however, some cost of capital at which it no longer make’s sense to engage in whatever activity you were planning on.
We are involved in lots of sale-leaseback transactions each year. One of the major drivers for that activity is how the cost of capital relates to the underlying rate of return possible with the use of those funds; not to mention, the overall availability of credit to begin with. If rates spike and/or credit dries up one possible short to mid-term outcome could be an uptick in overall sale-leaseback activity as companies look for alternatives to traditional financing. The investors involved in those types of transactions are often able to get much more comfortable with the risk profile of a given business and, as a result, provide some capital where it otherwise may not be feasible.
We’re in uncharted waters here so time will tell…
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
