QE Will End and Interest Rates Will Rise
U.S. unemployment seems to be falling, albeit unevenly. This means that the Federal Reserve will have some tough calls to make in 2014. In December, the Fed announced that it will start to taper Quantitative Easing (QE) beginning in January 2014, initially reducing monthly Treasury and MBS purchases by $10 billion per month and tapering further during the year if the economic recovery remains on track. The Fed left the door open for adjustments to bond purchases depending on the progression of the recovery, and also has expressed a willingness to hold off on increasing the key benchmark discount rate above 0.25% until well after the unemployment rate decreases below the previously announced 6.5% threshold. Unfortunately, the Fed cannot control long-term interest rates without QE. As a result, the FED is in a bit of a pickle.
Does it let the market begin to move long-term interest rates up to a more normal level without QE, or does it continue to intervene and keep long-term mortgage rates and the 10-year Treasuries artificially low? We expect Janet Yellen to err on the side of keeping QE in place for too long. With the QE taper, the market will push 10-year Treasury yields to between 3.75% and 4.25% by the end of 2014. This will have global implications, especially in emerging markets where interest rates take their cue from the U.S.
The housing recovery will continue. Home prices will rise in the high single-digit range (6%-9%) due to constrained new supply.
A dearth of acquisition, development and construction financing from banks who are now suffering from more punitive capital regulations, coupled with the failure by Congress to reform Freddie Mac and Fannie Mae and bail out FHA will mean that less than one million new housing units will be built, compared to 2007’s peak of 1.8 million units.
Secondary U.S. Markets Will See Expanded Demand
Demand for U.S. commercial real estate will finally move out to strategic secondary markets. For industrial property, this will mean places aligned with the new post-Panamax supply chain.
Secondary metro economies with an ICEE (Intellectual Capital, Education & Energy) focus will see the most office demand.
These markets will see capital migration and resulting cap rate compression from 8.5% and higher to 6% or even lower. They will include Charlotte, Raleigh, Charleston, Greenville, Tampa, Grand Rapids, Indianapolis and Memphis.
The liquidity and safety of the U.S. market as well as still attractive risk-adjusted returns on most commercial real estate types will sustain both domestic and foreign investment flows in the U.S., supporting increases in transaction volumes.
Industrial Will Be Top U.S. Performer in 2014
Industrial will remain the star performing real estate property type as U.S distributors, manufacturers and retailers scramble to remake their supply chains just in time for the onset of the first post-Panamax decade. With the continued growth of e-commerce and impending opening of the Panama Canal expansion in 2015/2016, the remaking of the global supply chain will have a profound impact on the U.S. industrial and retail markets. East and Gulf Coast ports equipped to handle the increase in cargo flows, such as Baltimore, Charleston and Norfolk, as well as inland ports and intermodal markets are well positioned to benefit from this change.
Source: 25 Predictions for 2014 | Q1 2014 | Global | Colliers International