For months, industry has gone back to an old pastime: hanging on every word uttered by people at the Federal Reserve.
Well, okay, that never completely disappeared, but it has been years since every word was as carefully parsed to tease out some insight into when interest rate policies might change.
Behind all the attention and careful navigation is an assumption that eventually things will go back to some version of "normal." That inflation will go back to 2%, spending will slow, wages will moderate, and unemployment will creep up toward an historically recognizable level.
Recommended For You
But Moody's Analytics has asked an important question. One that relatively few are asking. What happens if there is a new economic regime to develop and, if so, how would that affect commercial real estate?
"What if this unprecedented labor situation brings us into a new economic regime?" the firm asks. "A high-interest, high-inflation, and slow-growth economy is far from an impossible scenario. There are two job openings to every one unemployed person right now, a stat that hasn't occurred in the modern US economy. If this pressures wages and costs to rise further, the Fed could use economically damaging Volcker-like tactics or we enter this new economic regime."
If interest rates remain high, Moody's speculates that they could slow development and transactions volumes across property types. (Although, given consideration of historical interest rates, maybe those in the industry would do what others did in the past, which was adapt and do business anyway.)
Moody's looks at percentage of change in CPI and plotted that against percentage of rent change for multifamily, office, and retail. "Note the relative consistency of the trend lines over the last 40 years, although office stands out due to its large variance," they note, pointing to a graph they put together.
There is also a 40-year relationship between 10-year Treasury interest rates and inventory growth of multifamily, office, and retail.
Even though the Fed says they mean to stick to the 2% inflation target, as Moody's notes, the central bank adopted the 2% level at the start of 2012, according to the St. Louis Fed. At which point inflation began to fall until it hit 0.1% in 2015 and didn't return to 2% until 2017.
"Regardless, the era of cheap money appears to be over," Moody's writes, noting that the "long-term 10-year US Treasury yield flatlines at approximately 4%, and that could even go higher if service-sector inflation remains stubborn."
"In this new era, CRE does make for a decent inflation hedge, and it is worth noting that many old timers know of plenty of deals made with double digit financing rates back in the 80s, but the industry is slowing and will continue to move towards a new and active equilibrium," they add. "Opportunities will exist, but it will take a detail oriented, intelligent stakeholder to succeed in this environment."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
