"We're Not in Kansas Anymore"

NEW YORK CITY–A year of expectations that 2024 would herald a major rebound for commercial real estate and at least three rate cuts from the Fed has given way to the cold reality that it’s time to stop making predictions.

The double gut-punch of a stubbornly high inflation rate and a strong signal from the Fed that it will stay the course with interest rates has everyone considering what the new normal may look like or whether it will be normal at all, at least in terms of historical comparisons.

Where rates will end up this year was the big question for the panel on capital markets at our annual net lease conference in New York this week—and like everyone in the audience, our experts confronted the uncertainty of the moment.

“We’re not in Kansas anymore,” said Barclay Jones, EVP of the Carlyle Group. “The uncertainty is pretty significant. I’ve been on a lot panels lately and heard a lot of things and each time I leave I’m a little less certain.”

“I don’t think historical models really work well today,” said Guatam Mashettiwar, EVP of Arch Street Capital Advisors. “It feels like there’s more elevated risk.”

Asked if he thought the net lease transaction volume would improve significantly this year, Mashettiwar responded: “My heart and my wallet say yes, but my head tells me it’s going to be a muted year, really different than what people expected.”

“People expected 2023 to be bad and they really expected things to be better in 2024,” he added. “But the further and further we get into 2024, the more it just feels a lot like a repeat of 2023.”

Miguel Jauregui, managing director of capital markets for Sands Investment Group, said he’s keeping an eye on the spread between lenders’ rates and the 10-year Treasury yield.

“What I’m looking at is whether lenders decrease their spreads because they have more confidence in the market,” Jauregui said. “We used to see 125 to 130 bps spreads in the best of times. Today we see spreads of 175 to 200 bps.”

“That’s not really going to come down until we see lenders have more confidence and we see more lenders come back to the market,” he added.

The sober reality that speakers and attendees alike grappled with this week is that the new normal for rates may be more than 4% and that, in an election year, the Fed may discover it needs to adjust its inflation target for quantitative tightening of monetary policy.

This is how close anyone came to cautious optimism:

“I’m hoping that Jerome Powell decides that 3% is what he’s comfortable with,” Jauregai said, regarding the inflation rate.

Uncertainty doesn’t change the fundamentals of assessing a transaction, Jones noted—it puts them front and center.

“The real thing you have to look at is if I’m going to own an asset for a long period of time, am I going to earn a given return and do I think the fundamentals of the property type is going to support that return over the long term,” he said. “What do you want to earn—and are you investing in something that’s going to give you that over a long period of time.”

“That’s how I think about things, rather than are we going to be at 4.25% or 4.60%,” he added.