What investment might look like when the uncertainty clears
Interest rates have hit rock bottom and people are holding onto cash while the nation waits for the Presidential election and a cure for Covid-19.
Even though the nation is in a time of tremendous disruption—leading to rampant uncertainty and record-setting, troubling highs in several economic indicators—commercial real estate still has great upside potential, according to a Marcus & Millichap video in which John Chang, SVP, director, research services, delivered remarks.
Led by the Coronavirus pandemic, and its resulting economic headwinds—with a contribution by the upcoming election and its rancor—M&M’S Economic Uncertainty Index has been literally off the charts, he said.
The tool has been at a record high since March, when the coronavirus first became a known inhabitant of the United States.
Additionally, Chang noted, interest rates and savings have hit record lows. “US bank reserves are at an all-time high of $2.8 trillion, an increase of more than a trillion dollars since February; and bank deposits are at a record high of $15.8 trillion.”
That status of other indicators generally would spell trouble too. Corporate cash has reached an all time high of $1.75 trillion and the personal savings rate peaked in April at 33.7%, Chang shared.
It has since come down to 18%, but it generally resides at 7% to 8%. As a result, he said, bank deposits are at a record high of $15.8 trillion.
Nevertheless, Chang asserted, “The US still has potential for an aggressive expansion, at some point. When the forces creating uncertainty abate, a lot of capital that’s been sitting on the sidelines—i.e. the dry powder—will come back into the market as spending and investment, once a substantive stimulus package is passed and the election is resolved.”
The finding of a vaccine, or other cure for Covid-19, would be an even more stabilizing force. If that happens within the next six months, Chang stated, “We may be on the cusp of a significant reduction of uncertainty. As money flows back into the economy, it could deliver a significant economic boost.”
That capital would boost consumption, benefitting retail, industrial and possibly hotel properties, according to Chang. Self-storage and apartments also likely would flourish.
But Chang did issue a warning. “Falling uncertainty could result in upward pressure on interest rates. If you think about it, this implies that investors who take action today have the chance to get ahead of the wave while maximizing yield spread over the cost of capital.”
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