On Wednesday of last week, the Federal Reserve made its highly anticipated pause in interest rate hikes following CPI Data that suggested that inflation continues to cool. The 4% print was in line with expectations and continues a downward trend that has been in place since June of 2022. Thankfully, it was low enough to warrant pausing to reassess the effectiveness of rate increases from the last year and a half. As we have mentioned in the past, we do not anticipate a rapid decline in rates because while 4% is still getting better, it is still double the Fed’s target of 2%. Chairman Powell has gotten so frustrated with the derivatives market that he reiterated again that he does not anticipate cutting rates for multiple years. Clearly the market still isn’t buying it.
Traditionally, international central banks work very much in concert with each other. There may be some variation in activity, but in order to prevent disruptive trade and currency imbalances, they like to retain some level of stability relative to each other. With that in mind, last week, the Canadian Central Bank raised rates again after a 4 month pause following inflation data that suggested that they cannot yet claim victory with the current rate hike cycle. Not surprisingly, the guidance from the Fed suggested further hikes following this pause. Frankly, it makes us wonder why they pause at all if the guidance is for more hikes… but we digress.
While these things are very difficult to predict, the reaction of US investors in private markets has been to sit on their hands and not transact. If the pause gives them any clarity as to what rate to use to discount cash flows, there is every possibility that those prices are higher than current market rates. Could this spur consumers and employers to spend and hire? Of course it could! Frankly the opposite pricing activity could also happen. That may even be more likely on investments with vigorous underwriting. However, the certainty that investors are looking for from a pause may be short lived and the Canadians are certainly evidence of that concept.
Meanwhile, as we continue to underwrite deals in the Multifamily space there are a few inflationary items on the cost side that are ultimately going to make pricing more difficult. First, input costs from building materials have been all over the map. During the pandemic shutdowns, timber went through the roof. So did roofing materials and tile. But they’ve come back to earth, albeit at a higher rate. Volatility remains high, so the underwriter must remain conservative. Meanwhile, insurance costs have gone to the moon in certain markets as the insurance companies have taken terrible losses due to both huge catastrophes and poorly timed inflation. This is an environment that requires two very specific skills: 1. The ability to see value in the long term. 2. The patience to wait for the right asset in the right location. The current uncertainty surrounding input costs will ultimately result in both huge mistakes and lucky wins. But for those of us that do the work to make sure we understand where longer term value is generated, there are huge opportunities while everyone else sits around waiting for certainty.