Two Prologis Bold Predictions for the Economy

All props to Prologis. If anyone knows industrial, logistics, and supply chain real estate markets, they do. And they have a number of 2024 “bold predictions” for supply chain, two of which being financial. Bullish and bold are fine, but best when paired with proper risk management (which one suspects that Prologis regularly applies to their business decisions).

One of the two financial predictions is that interest rates declines will double private equity real estate funding. They base this on three factors. One is an assumption that the Fed is underestimating the decline of inflation.

“Our projections take the bull case on interest rate cuts,” they wrote. “While the latest Federal Open Market Committee member projections from December show a median federal funds rate in 2024 in the mid-4% range, lower than 2023’s mid-5% range, we expect inflation to slow more quickly than anticipated.” Could be. Or it could be that inflation will take its sweet time to recede. Correctly calling this factor has stymied many experts and market watchers.

The second part of their argument is that the 10-year Treasury yield would “dip below 4% in 2024, ahead of consensus views for around 4%.” Checking the Treasury’s data feed, the 10-year has been below 4% for about the last two weeks. Would that be considered a dip/? Certainly, though we’ve yet to see what happens next year.

It also would be good to consider what billionaire bond trader Jeffrey Gundlach has predicted, that a sub-4% 10-year yield sounds “almost like a fire alarm” that might be the sign of a recession.

Prologis also pointed to large amounts of “dry powder” on the sidelines, with “interest rate declines in the second half of the year [that] will unlock entry into the market as the capital markets cycle begins to turn.” Again, perhaps. Perhaps supply chain is unusual in this regard, but professionals have been talking to GlobeSt.com about capital at the ready that was waiting. Would a total 75 basis point fall in rates become that much of an imperative?

The question does focus on the 10-year. If it falls enough, then investors might start itching for yield and decide that alternative investments were again necessary. But if 2023 wasn’t convincing with a federal funds rate of 5.4 to 5.6, is 2024’s 4.6 to 5.4 compelling if investors thought that 2025’s projected 3.4% to 4.9% might seem sweeter.

The second overall CRE financial projection was that cap rate movements would reverse. “Yield spreads between Western and Asian markets widened from a low of minus 50 bps in early 2022 to 130 bps in Q3 2023, higher than the 2019 average of 30 bps,” they wrote. Also, they pointed again to a decline in the cost of capital in the U.S. and an increase in Japan.

Part of their rationale might also be the effect of a flood of capital into CRE in the U.S., driving up prices and suppressing cap rates. But there is also the wish to get a great deal — to look for distressed assets. To wait for the better deal. To ask if it’s practically possible at the time to look for big rent increases that are often necessary for a deal to support falling cap rates. Whether, looking specifically at industrial properties, supply chain requirements will drive up the need for more properties or if there is pressure releasing in the form of supply chain tightness.

It’s unlikely that anyone knows the answers. Maybe this is a form of scenario planning without mentioning the likely or negative variations. But just as smart planning means not assuming everything will be great, it also requires the recognition that perhaps it might be.