INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY - Real Estate in Context
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Real Estate in Context:
INTEREST RATES,
STAGFLATION,
INFLATION, AND
MONETARY POLICY
1
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY
Real Estate in Context:
INTEREST RATES, STAGFLATION,
INFLATION, AND MONETARY POLICY
EXECUTIVE SUMMARY
Changes in monetary policy appear to take five to six
quarters to affect leveraged apartment returns.
Real apartment returns outperform equities during times
of “quasi-stagflation.”
Cross-Correction, Changes in Actual Inflation and Changes in Yields
Keep a close eye on the 10Y breakeven inflation rate. This
measure of inflation expectations is much more related
to changes in Treasury yields than actual inflation.
Average leveraged apartment returns tend to remain
stable during times of high inflation. In this paper and
A Better Way to Assess Inflation and Risk in Real Estate,
we found that inflation does not typically spell trouble for
multifamily real estate.
The “taper tantrum” was overblown in terms of impact
and severity. If the Fed’s accelerated tapering at some
point spooks the market, it is unlikely to have lasting
effects and would likely subside rather quickly.
2
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY
I nterest rates, monetary policy, and inflation are becoming
increasingly important factors to consider when analyzing
real estate markets. The U.S. economy has experienced
above-5% inflation for six consecutive months, prompting Federal
Reserve Chairman Powell to discontinue the term “transitory”
when describing inflation pressures. Hawkish developments have
taken place at the central bank, with the bank announcing it will
double the rate at which it reduces monthly purchases of Treasury
and MBS securities. The new timeline suggests an end to Treasury
and MBS purchases by March 2022. In addition to changes in the
Fed balance sheet, forecasts suggest there will be as many as
three rate hikes in 2022 and three more in 2023.
A changing interest rate and QE environment, coupled with
accelerating inflation, makes now a great time to analyze the
relationships between multifamily, inflation, interest rates,
and more. Keep in mind, however, that we have not seen
inflation this high in a while. Our analyses involving inflation,
and otherwise, are an attempt to get as close as possible to
understanding trends and relationships given the lack of data
for perfectly cognate economic periods.
KEEPING A CLOSE EYE ON YIELDS
As a benchmark for mortgage rates, it’s no surprise that many multifamily investors keep a close eye on the 10Y Treasury
yield. With inflation’s persistence, and recently acceleratory behavior, understanding how inflation and yields are related
is more important than ever.
Many in the market view actual inflation as a driver of yields, opting for an assessment of current inflationary pressures to
arrive at conclusions about the direction of yields. Commonly understood is the positive relationship between inflation and
yields, but too often is actual inflation assessed over inflation expectations. As expected, the below charts show that inflation
expectations, proxied by the 10Y breakeven inflation rate, are more important indicators of yields, and that both changes in
actual and expected inflation have contemporaneous (lag = 0) effects on changes in yields. That is, an above-average rise
in either actual or expected inflation is likely to lead to an above-average rise in yields in the same period, with the stronger
relationship existing between expected inflation and yields.
Cross-Correlation, Changes in Actual Inflation and Changes in Yields
0.2
0.1
0.0
-0.1
-0.2
-20 -10 0 10 20
Lag
Cross-Correlation, Changes in Expected Inflation and Changes in Yields
0.4
0.2
0.0
-0.2
-20 -10 0 10 20
Lag
Our cross-correlation function outputs the correlation between yields at time t and actual / expected inflation at time t±n, for lag ±n. Blue bands represent 95% confidence levels for
each time-lagged correlation coefficient – statistically significant values lie above or below the bands. Historical scope is bounded due to limited data for expected inflation proxied
by the 10Y breakeven inflation rate (2003 – present). These correlations may differ under various time restrictions, especially during the high inflation environments of the 70s and 80s.
4
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY
LEVERAGED APARTMENT RETURNS UNDER VARIOUS INFLATION ENVIRONMENTS
Average Leveraged Apartment Return (AROR)
20%
Leveraged returns tend to remain stable
15% in higher inflation environments. In
periods of deflation and sub-1% inflation,
10%
leveraged apartment returns average out
5%
to a significantly negative value, strongly
0% driven by negative returns during the Global
-2% - 1% 1% - 4% 4% - 7% > 7%
Financial Crisis. As we move from lower to
-5%
higher inflation environments, leveraged
-10%
returns are largely unaffected, evidenced
-15% by the flat curve from the second to final
inflation environment in the left chart.
-20%
Actual Inflation Environment (1987 - present)
Average Leveraged Apartment Return (AROR)
20%
The relationship between yields and 15%
leveraged returns is not very straightforward.
Leveraged apartment returns exhibit 10%
irregular behavior under various yield
environments – sometimes high-yield 5%
environments imply high leveraged returns,
and sometimes the opposite is the case. 0%
0% - 1% 1% - 2% 2% - 3% 3% - 4% 4% - 5% 5% - 6% 6% - 7% 7% - 8% 8% - 9% > 9%
-5%
10Y Yield Environment (1987 - present)
THINKING OF CAP RATES AS REAL RATES OF INTEREST
Average Cap Rate - 10Y Average Real DBAA - 10Y
3%
Nominal cap rates behave a lot like real
interest rates. The orange curve is the
2%
spread between real Baa corporate bond
yields (DBAA) and the 10Y yield in varying
1% inflation environments. The macro similarity
between these spreads is revealed in the left
chart, where the average cap rate spread is
0% equivalent to the average real DBAA spread
-2% - 0% 0% - 1% 1% - 3% 3% - 4% > 4%
plus a roughly constant delta.
-1%
Actual Inflation Environment (2003 - present)
5
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY
FED TAPERING AND THE “TAPER TANTRUM”
Private Apartment Returns Unphased by 2013 Taper Tantrum
30% 6%
20%
5%
10%
4%
0%
04
04
05
05
06
06
07
07
08
08
09
09
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
Q1 8
19
Q1 9
Q3 0
20
Q3 1
21
1
1
2
2
3%
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q3
Q1
-10%
2%
-20%
1%
-30% May 22, 2013
Bernanke sparks ‘taper tantrum’
-40% 0%
Private Apt Return (LHS) 10Y Yield (RHS)
In 2013, then Fed Chairman Bernanke sparked a bond sell-off and surging yields, dubbed the “taper tantrum,” after he
signaled the Fed may in the future begin reducing bond purchases. Thus far, there has not been a “taper tantrum” due
to Chairman Powell’s tapering announcements, but the market remains vigilant in this respect.
It’s our view that the taper tantrum was a bit overblown. Private apartment returns were largely unphased by the 2013
taper tantrum, and so too were equity returns in large part. Contrary to general coverage of the taper tantrum, the event
wasn’t all that bad, even for equities - the S&P 500 experienced a subtle pullback, which subsided shortly thereafter.
6
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICY
MULTIFAMILY AND STAGFLATION?
The emergence of the Omicron variant has some worried about the prospect of stagflation, a period of high inflation and low economic
growth. If the variant succeeds in further complicating supply chains, and inflation persists, we may find ourselves in a period of stagflation.
To capture the effects of a more generally defined environment of high inflation and low growth, we studied performance during “quasi-
stagflationary” periods in the context of (1) the broad U.S. stock market proxied by the Wilshire 5000, (2) the tech-heavy NASDAQ, and
(3) private apartments. Quasi-stagflation in our analysis is loosely defined as a period where inflation exceeds 3%, and real GDP growth
is lower than the previous period. The results indicate that, on an inflation-adjusted basis, private apartments outperform during times
of ‘quasi-stagflation.’
‘Quasi-Stagflation’ Visualized
40%
30%
20%
10%
0%
1987-04-01
1988-01-01
1988-10-01
1989-07-01
1990-04-01
1991-01-01
1991-10-01
1992-07-01
1993-04-01
1994-01-01
1994-10-01
1995-07-01
1996-04-01
1997-01-01
1997-10-01
1998-07-01
1999-04-01
2000-01-01
2000-10-01
2001-07-01
2002-04-01
2003-01-01
2003-10-01
2004-07-01
2005-04-01
2006-01-01
2006-10-01
2007-07-01
2008-04-01
2009-01-01
2009-10-01
2010-07-01
2011-04-01
2012-01-01
2012-10-01
2013-07-01
2014-04-01
2015-01-01
2015-10-01
2016-07-01
2017-04-01
2018-01-01
2018-10-01
2019-07-01
2020-04-01
2021-01-01
-10%
-20%
-30%
-40%
Real GDP Growth Inflation Rate Quasi-Stagflation
Average Real Annual Return in Quasi-Stagflationary Environments
(1987 - present)
6%
5.38%
5%
4% 3.81% P RIVAT E
A PA R T M E N TS
3% 3Q21
2% was the first time since
3Q11 that the U.S. economy
1% met the criteria for “quasi-
0% stagflation” as we have
defined it here.
-1%
-2%
-1.77%
-3%
7
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICYHOW LONG DOES IT TAKE FOR CHANGES IN MONETARY
POLICY TO IMPACT MULTIFAMILY?
In many instances, it takes time for changes in one economic indicator to translate into changes in another indicator. So, how long
does it typically take for changes in monetary policy to affect multifamily metrics?
We leverage the use of a conditional time-lagged cross-correlation analysis to uncover the time lag at which two signals of interest
are strongly in phase with one another.
8
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICYLEVERAGED APARTMENT RETURNS
To obtain a more precise view, we considered the following relationship while restricting our view to periods where changes
in the effective federal funds rate (EFFR) are at least 25bps. This way, the relationship we find will be more explanatory in
the context of the current situation.
In periods where changes in the EFFR are greater than
25bps, there is an over -70% correlation between changes
in the EFFR and changes in the leveraged apartment
A rate hike is likely to lead to either a modest return six quarters later.
rise, or decline, in leveraged returns six
quarters later. The higher the rate cut, the
∆ ∆
LEVERAGED
6
more likely leveraged returns will rise six
quarters later.
EFFR QUARTERS APARTMENT
RETURN
2004 – present; R2 = 50%; p-value = 0.038%
Like the previous analysis, we again restrict our view to periods satisfying a given condition. This time, we only look at periods
where the change in the rate of growth in the Fed’s balance sheet exceeds 5%. Just like before, we do this to analyze the
relationship between changes in QE and changes in leveraged apartment returns only in periods where there is a significant
change ongoing.
In periods where the growth in the Fed balance sheet
is accelerating or decelerating by at least 5%, there is
The higher the acceleration in the growth an 80% correlation between changes in the growth in
the Fed balance sheet and changes in the leveraged
of the Fed’s balance sheet, the more likely
apartment return five quarters later.
leveraged returns five quarters later will
experience significant growth. The higher
∆ ∆
the deceleration in the Fed’s balance sheet, GROWTH LEVERAGED
the more likely leveraged returns will fall
five quarters later.
IN FED
BALANCE
SHEET
5 QUARTERS APARTMENT
RETURN
2004 – present; R2 = 64%; p-value = 0.00053%
CAP RATE - YIELD SPREADS
For reasons described above, we again restrict our view to periods where changes in the EFFR are at least 25bps.
In periods where changes in the EFFR are greater than
25bps, there is an over -76% correlation between changes
The higher the rate hike, the more likely the in the EFFR and changes in the cap rate - yield spread in
cap rate - yield spread in the same quarter the same quarter.
will grow modestly, or decline. The higher
the rate cut, the more likely the cap rate - CAP
yield spread will rise in the same quarter.
∆ EFFR 0 QUARTERS
∆ RATE -
YIELD
SPREAD
2004 – present; R2 = 58%; p-value = 0.0035%
The relationship between changes in the rate of growth in Fed assets and changes in the cap rate - yield spread is relatively
weak compared to the other relationships we’ve reported so far.
9
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICYCONCLUDING REMARKS
Inflation, interest rates, monetary policy, and even the prospect of stagflation are all of concern to multifamily
investors, and rightfully so. Consider the points we find to be most impactful:
• Changes in monetary policy appear to take five to six quarters to affect leveraged apartment returns.
• Real apartment returns outperform equities during times of “quasi-stagflation.”
• The “taper tantrum” was overblown in terms of impact and severity. If the Fed’s accelerated tapering
at some point spooks the market, it is unlikely to have lasting effects and would likely subside
rather quickly.
• Keep a close eye on the 10Y breakeven inflation rate. This measure of inflation expectations is much
more related to changes in Treasury yields than actual inflation.
• Average leveraged apartment returns tend to remain stable during times of high inflation. In this
paper and A Better Way to Assess Inflation and Risk in Real Estate, we found that inflation does
not typically spell trouble for multifamily real estate.
10
BERKADIA® | REAL ESTATE IN CONTEXT: INTEREST RATES, STAGFLATION, INFLATION, AND MONETARY POLICYWe can help you navigate the
complexities of commercial real estate
About Berkadia Research
Researchinquiries@berkadia.com Berkadia Research leverages proprietary
models and analytics to deliver actionable
insights to the commercial real estate
Jonathan Rappa Noah Stone industry. Covering markets and submarkets
across the nation, our experts monitor and
Senior Director of Author, Economic Analyst
interpret market fundamentals and utilize data
Business Operations
science to uncover hidden trends. Through a
combination of curiosity and expertise, we
Scottsdale, Arizona Irvine, California aim to augment client decision-making by
providing data-driven and unique research not
found elsewhere.
© 2022 Berkadia Proprietary Holding LLC. Berkadia® is a trademark of Berkadia Sources: Proprietary statistical
Proprietary Holding LLC. Commercial mortgage loan banking and servicing businesses models by Berkadia Research,
are conducted exclusively by Berkadia Commercial Mortgage LLC and Berkadia National Council of Real
Commercial Mortgage Inc. This advertisement is not intended to solicit commercial Estate Investment Fiduciaries
mortgage loan brokerage business in Nevada. Investment sales / real estate brokerage (NCREIF), Federal Reserve
business is conducted exclusively by Berkadia Real Estate Advisors LLC and Berkadia
Economic Data (FRED).
Real Estate Advisors Inc. Tax credit syndication business is conducted exclusively by
Berkadia Affordable Tax Credit Solutions. In California, Berkadia Commercial Mortgage
LLC conducts business under CA Finance Lender & Broker Lic. #988-0701, Berkadia
Commercial Mortgage Inc. under CA Real Estate Broker Lic. #01874116, and Berkadia
Real Estate Advisors Inc. under CA Real Estate Broker Lic. #01931050. For state licensing
details for the above entities, visit www.berkadia.com/legal/licensing.
This document and any statements, information, data and content contained therein,
and any materials, information, images, links, sounds, graphics or video provided
in conjunction with this document (collectively “Materials”) has been prepared for
informational purposes or general guidance on matters of interest only, and does
not constitute professional advice, advertising or a solicitation. The Materials are of
a general nature and not intended to address the circumstances of any particular
individual or entity. You should not act upon the information contained in the Materials
without obtaining specific professional advice. As such, nothing herein constitutes
legal, financial, business, investment or tax advice and you should consult your own
legal, financial, tax, investment or other professional advisor(s) before engaging in any
activity in connection herewith. The information in the Materials is not a substitute
for a thorough due diligence investigation. No representation or warranty (express or
implied) is given as to the accuracy or completeness of the information contained in
the Materials, and, to the extent permitted by law, Berkadia Commercial Mortgage LLC
( together with its affiliates, the “Company”) neither accept nor assume any liability,
responsibility or duty of care for any consequences of you or anyone else acting, or
refraining to act, in reliance on the Materials or for any decision based on them. No
part of the Materials is to be copied, reproduced, distributed or disseminated in any
way without the prior written consent of the Company.You can also read
