It’s Time for Investors to Get Off the Sidelines

Though the economic environment remains uncertain, the time for deal-making is now, says Avison Young's Jonathan Hipp.

Jonathan Hipp
Jonathan Hipp, Principal & Head of U.S. Net Lease Group, Avison Young. Image courtesy of Avison Young

Recent U.S. economic news has shown nothing if not uncertainty about the future. Here are some examples that happened within a few weeks of each other:

  • The Federal Reserve Bank of New York warned that supply chain disruptions still negatively affect businesses.
  • Various sources have said the country is in a rolling recession with sectors taking turns.
  • The Federal Open Market Committee wonders if current rates will curtail inflation.
  • The Fed’s May Beige Book said economic activity expanded except for softening commercial real estate.
  • Unemployment inched up to 4.0% for the first time since January 2022.
  • June’s look at the consumer spending that drives almost 70% of GDP showed a slowdown.
  • Yields on the 10-year Treasury go up and down.

The June FOMC meeting’s economic projections showed current median sentiment that there might be only one rate cut in 2024. That isn’t policy and Federal Reserve Chair Jerome Powell said decisions are ultimately data dependent. There could be two cuts, or one, or, depending on new data, none until sometime in 2025.

More importantly, it doesn’t matter. Even two cuts would only represent be a drop of 50 basis points — hardly something to drive momentous new activity. Business was possible in much worse times. At its peak in January 1981, the effective federal funds rate hit 19.08%. The low in the ’80s was only 5.89% in October 1986. Remember the movie “Wall Street” and the phrase “greed is good?” It came out in 1987 when the low rate for the year was 6.10%, the high was 7.22% and actual CRE lending was much higher. Still, people made a lot of money.

We could discuss Elisabeth Kübler-Ross and her stages of grief. Many investors, owners, lenders and brokers have been upset for good reason. Valuations and transactions are down significantly. Past decisions to load up on cheap credit made refinancing a challenge now.

The first six stages of grief are past. Now is the time for acceptance. Don’t wait for future financial conditions to improve to look for deals. That invites serious opportunity costs. Not in the accounting sense for later analysis to see if your strategy was sensible, but in the true avoidable loss of future revenue and business relationships. In the ability to profit from investing capital rather than letting them lose value to inflation. Finding a stronger investment than parking cash in Treasurys and hoping that yield changes don’t undermine their value, so you have to hold to maturity or take a loss. Helping support the entire CRE ecosystem and your business partners for the future. And being ahead of the crowd when things improve, not trailing behind.

Your immediate past decisions might be painful to contemplate, but the right attitude and approach is to look and move forward. Assume, at least for now, that business conditions have changed, that there’s been a reversion to the long-standing mean. Recreate your strategy and deal-making to be effective under current conditions. It’s time to dust off and start moving once again. And if conditions do improve, you’ll be even better off.

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