Negative Spreads Could Indicate an Impending Recession

The spread between the prime rate and industrial cap rates has turned negative, a historical marker of an approaching recession. A new report from NAI Capital shows that these spreads are just beginning to turn negative. The last time this happened was in 2005, and the spreads stayed negative until mid 2008. The spreads also turned negative in 2000, before the Dot Com Bust of 2001, and in 1989 before the 1990 recession.

“Historically, we are due for a downturn. Now, more and more or the signals are starting to point toward a downturn of some kind, but how drastic it is going to be and how sharp it is going to be is anyone’s guess,” Brent Avis of NAI Capital’s investment services group, tells GlobeSt.com. “I don’t think that there is anyone that is educated in finance globally, nationally or hyper locally that doesn’t see something coming.”

Avis says the increase in the cost of capital is going to force cap rates up. Over the next year, interest rates are expected to rise another 50 basis points, which will put downward pressure on investment sales. “At the end of the day, the cost of money is going up,” says Avis. “As the cost of money increases, you can afford to borrow less, as you can afford to borrow less, you lose your leverage and you lose buying power. If someone is looking to sell, pricing has to come down for that same buyer to get the same expected returns. As interest rates rise, cap rates are going to have to come up to meet them, if you are going to move any product.”