Did We Miss This Cycle's Correction?

Did we already have a recession? It was the opening question of Michael Van Konynenburg's National Real Estate Economics keynote address at the annual Allen Matkins' View From the Top conference this week. Van Konynenburg, the president of Eastdil Secured, suggested that the extreme volatility that we have seen this cycle in China, oil, yields, CMBS, Brexit, precious metals, US elections and North Korea may be acting as the “correction” this cycle.

Without giving a firm opinion, he went onto look at the dichotomy of market fundamentals, which remain positive overall. “We have a lot of continued confidence,” he said, adding that last year at the conference Brexit was a major concern and some wondered if “democracy would be coming apart.” “The European markets have stabilized. In 2017, the largest economies in the world are accelerating in growth.”

Wage growth, small business optimism, strong unemployment and a predicted decrease in the 10-year treasury were all areas worthy of celebration, according to Van Konynenburg. “Wages are growing again, and are the best since the beginning of the conference. Small business optimism is the highest since 2004, and unemployment is back to 15 year lows,” he added. Then came the opposition. Tight unemployment could bring inflation, he said, quickly adding, “Core inflation is under control. Despite having oil up, inflation is surprisingly under control.”

Van Konynenburg also outlined areas that his firm is keeping a close eye on, calling out the 10-year treasury and Fed activity specifically. While he predicts that the 10-year will come down to 2.10, he also wondered if that was sustainable. Additionally, he said that Janet Yellen outlined a runoff in the Fed's balance sheet, and plans to decrease its balance sheet by 33% in the next three years. “We are watching that,” said Van Konynenburg. “A lot of things are both positive and things to keep our eyes on.”

When it came to interest rates, Van Konynenburg took a similarly cautious approach. “Low rates will push people into more and more risk,” he said. “We are already seeing that in other markets, but have not yet seen it in our own markets.” According to his research, floating spreads have tightening 133 basis points and fixed rates are 15 to 25 basis points higher than at the election. “There is a huge flow of capital into fixed income,” he said, adding, “People are anticipating higher rates.

He showed more optimism in the equity markets, but only for quality assets in core markets. “Equity markets are fluid, and there is strong demand for the best assets in the best markets. If you go past that, they are much more selective,” he said. “We are seeing more optimism as you move West than as you move East.”