Page 15

CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 13 Leonard Kiefer: Yes, the labor market. Earlier in the year we were adding over 200,000 jobs per month, then things slowed down a bit in the August data. It was disappointing that we only had 142,000 net new jobs in August but we should not make too much of those month-to-month numbers. There are always revisions. Overall, I think that the underlying labor market trends actually show some strengthening. Even though nationally the unemployment rate is about 6.1 percent, which is not far off from a long-run average rate, other indicators such as long-term unemployment, part-time work, participation rates, and wage growth to name a few, speak of a relatively weak labor market. But we are seeing things firm up and our tracking data on third quarter economic growth in particular looks pretty good. We had a solid second quarter, and we expect the fourth quarter to be pretty good as well so things will start to firm up. But it is going to take a while; it is going to be a grind, especially in the jobs arena. It is probably going to be a year and a half before the headline unemployment rate falls well below 6.0 percent. It might bounce around if labor force participation moves but we see things picking up. That is badly needed, particularly if you look at the younger age demographic including 25 to 34 year olds. Sam Chandan: The persistence of a slow but improving job recovery suggests limited wage pressures. Should we expect little in the way of inflation? Leonard Kiefer: A higher rate of inflation could happen. But if you look at overall growth and the global situation, that will dampen things again. So I do not see inflation really taking off. On the other hand, and independent of an uptick in inflation, some may say we will see interest rates spike and rise very quickly. I actually do not think that is likely to happen. I think you will see a lot of volatility, and that rates may spike significantly around policy announcements, or just around speculation of those announcements, and then I think things will settle back down and it will be a more gradual adjustment until we back into higher rates over the next three to four years. Sam Chandan: Peter, from your vantage at Cantor, what is the market expecting in the interest rate environment over the next couple of years? Peter Scola: I generally agree with everything that Len has said. A couple of things I would like to add. First, as far as interest rates are concerned, I believe we are cheap relative to other countries, particularly when you look at the fundamentals of their economies versus ours. Second, I think we’re going to be in a historically low-rate environment for a while. I also wouldn’t be surprised if we continue to see volatility. I expect the volatility in the underlying risk-free rate will continue as everyone tries to figure out where we are going over the next few years. I’ve consistently said over the last 5 years that rates are going up, I just don’t know when. Brian Olasov: Yes, and obviously this has been something of an obsession among lenders. But I also get a sense of interest rate shock fatigue because the pundits have been calling for interest-rate shocks now for such a long period of time that market participants are generally complacent. And I would say that one of the locations where the complacency does put the lender at risk is back in the banking sector. The banking industry has $2 trillion worth of loans that either mature or reprice after five years. That’s one-in-four loan dollars in the banking system. That doesn’t match up with the duration of liabilities in banks. Sam Chandan: What was the process of adjustment in the market last summer when we had the big rate spike between May and July? Peter Scola: During the first half of the year prior to the spike, people were operating in a very low-rate environment, arguably unsustainably low. All of a sudden, the market started reacting to a possible increase in rates, which resulted in volatility across the broader markets. I think the market’s reaction spooked people for a while, especially as we all continue to adjust to a seemingly new normal. CRE Finance Roundtable: The Risk Cycle “Rates will remain low although we are getting better news recently. We do not see them rising sharply until we have a stronger economic recovery underway.”


CREFW-Fall2014 10.15.14
To see the actual publication please follow the link above