2020 was a year like no other and 2021 is starting out with turmoil and change. Let’s look at some trends to watch in 2021.
Covid and the return to “normal”: The U.S. is experiencing record spikes in cases, hospitalizations and deaths while the pace of vaccination has been slower than expected. In the U.S., over 10 million people have received at least one dose, about 3.3% of the population.
Optimism: New policies, wider distribution (mass vaccination centers, availability at pharmacies, etc.), and the expected approval of more vaccines should increase the pace. Estimates of normalcy range from Memorial Day to Labor Day.
Fiscal Policy/Inflation Outlook: Look for further stimulus as the recovery has been bumpy and uneven. The Fed estimates that the unemployment rate amongst the lowest paid workers is over 20%. The results of the Georgia runoff elections resulted in Democratic control of the Senate. Combined with recent economic data indicating that job growth stalled in December, this greatly increases the likelihood and expected volume of further stimulus from Washington. More stimulus = more dollars, more treasuries, and economic growth. Also, oil prices are over $50 a barrel, the highest since last February as major producers are limiting output. As normalcy returns, pent up demand for travel and other economic activities are expected to push prices up further. Could we see the return of “classic” inflation for the first time in over a decade? Will the Fed allow the economy to “run hot” in excess of its 2.00% target without raising rates? Will investors once again view commercial real estate as an “inflation hedge”, again?
Interest Rates: Due to ultra accommodative Fed policy, 2020 saw borrowers taking advantage of all time low fixed rate financings from Fannie/Freddie, CMBS, Life Companies and Banks. Rates in the 3.00% range for full leverage loans (with some IO) were available for the right properties (typically apartments, industrial, self-storage and selected office). 2021 is starting out with a jump in Treasury yields as the 10 year spiked from 0.84% to 1.15% in three weeks, before settling at 1.09%. The anticipated recovery should result in a steeper yield curve. Already, hedge funds are engaged in the “steepening trade” – buying short term treasuries and selling long term. Residential mortgage applications jumped 20% last week as borrowers rush to lock in low rates. Will commercial real estate borrowers and buyers join them? Will the Fed step in with “yield curve control” and buy longer term treasuries to keep those rates in check? Or, will the Fed turn hawkish, “declare victory” and ease up on bond purchases, allowing rates to rise?
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners