This week I'd like to share another piece from Don Zech, commercial real estate guru, on the current state of interest rates, inflation, and economic cycles...enjoy.
In the opening scene of Shakespeare’s Macbeth, the witches gather around a cauldron making a potion and chanting, “Double, double toil and trouble; fire burn and cauldron bubble.” Well, let me tell you that a bubble’s famous last words are always, “I’ll be back!” The Fed is in an unenviable position of controlling rampant inflation and not creating too much unemployment. Obviously, we are at the end of ZIRP (Zero Interest Rate Policy) because ZIRP requires printing money and that causes inflation. As stated, the Fed is trapped, and it must choose to fight inflation or refuel the stock market bubble (so ZIP for ZIRP!).
With interest rates rising, we are seeing pressure on cap rates. Thus far, we are seeing some slow down in deal volume. Buyers struggle with interest rates and inflation and sellers are slow to accept price reductions.
Speaking of sellers being slow to accept price changes, I thought it might be worth sharing my phases of a seller going through an economic cycle.
Market is strong – “Not interested in selling, it’s still going up.”
Market is turning – “Ok, I will sell but I want higher than what you are telling me.”
Market starts down – “I’m not accepting that, I had higher offers last year.”
Market keeps going down – “I had higher offers two years ago. I’ll wait until it comes back.”
Market really goes down – “I can’t believe I could have gotten so much 2 ½ years ago. I can’t afford to sell now because all I will be able to do is pay off the loan and commission.”
Market in free fall – “It’s never coming back. Commercial real estate sucks! The world has changed forever. Why should I keep paying the bank when it’s worth less than the loan? Can you sell it for more than the loan or work out a short sale for me?”
Back to inflation...