GDP Growth & Capital Markets Update

release edition [021]

read time [5 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

GDP: Why Growth Matters
Newmark: 1Q25 Capital Markets Update
Weekly Listen: Real Estate Podcasts

GDP

As you may have seen here, U.S. Treasury Secretary Scott Bessent was interviewed on Bloomberg earlier this week.

In the conversation, Bessent spoke about controlling expenses and growing the economy to stabilize and reduce the deficit-to-GDP ratio from 6%+ today to below 3%.

Bessent's goal is to get sub-4% by 2028 through moving the trajectory of this ratio downward via the current Administration's three-legged stool policy approach: trade, taxes, and deregulation.

Bessent sees rising bond market yields as a global phenomenon, not an isolated U.S. event. Specifically, he notes that the U.S. 10-yr is the only yield that's down globally since inauguration day in January.

While the short and long ends of the interest rate curves do not move in lockstep, there is a historical 10Y-2Y average spread of ~85bps, which markets look to for stability and predictability.

With this, the Fed Funds Rate is at ~4.33% and the 2yr UST at ~3.99%. As shown below, today's spread is inside of the historical average at just 52bps, which would indicate the the 10yr still has room to rise given the current 2yr UST.

Said differently, the 10-yr remaining below the implied historical spread (3.99% + 85bps = implied 4.84% 10yr) speaks to the continued relative strength of the U.S. globally, as Bessent mentioned above.

Why does this matter?

Borrowing costs, like energy costs, are embedded throughout our economy.

While many believe that higher rates are what halt inflation, they can actually be inflationary because they both increase input costs and limit input velocity into the economic system over time.

If businesses are going to invest in human capital, CapEx, R&D, or the like, and their borrowing costs are higher relatively speaking, then those input costs are inherently going to be higher and lead to higher output costs.

This will lead to some combinations of lower margins and/or higher consumer prices over the near term.

Just as tariffs can be viewed as a 'consumption tax', the higher-for-longer Fed Funds Rate is almost like an 'expansion tax', penalizing businesses and economies that have a desire to accelerate their growth through the use of financing.

My working theory, based on Bessent's interview above and President Trump's consistent demands for Jerome Powell to cut rates, is that the current Administration knows that the only way the U.S. can escape eventual insolvency is through an accelerated growth of GDP.

The standard GDP equation is GDP = C + I + G + (X - M), where C represents consumption, I represents investment, G represents government spending, and (X - M) represents net exports (exports minus imports).

To grow GDP, America must consume, invest, and most importantly, become global exporter.

This is why we've seen President Trump in the Middle East getting investment commitments for U.S. based expansion, for example, because he and his team are well aware of the multiplier effect in the U.S. economy.

As shown below, the wall of U.S. Government debt continues to grow because of fiscal irresponsibility.

Reaganomics is a term that refers to the economic policies implemented by President Ronald Reagan during his presidency (1981-1989). It was characterized by a focus on supply-side economics, which believed that tax cuts would stimulate economic growth and job creation by encouraging businesses to invest and expand. Key components of Reaganomics included reducing government spending, lowering taxes, and reducing regulations.

Sound familiar?

Newmark

Each quarter, Commercial Real Estate firm Newmark publishes their U.S. Multifamily Capital Markets Report.

It's always jam-packed with super interesting charts and data.

Below are a few of those charts and data that caught my eye.

You can download the publicly available report here.

As you'll see in the report, the Capital Markets remain relatively healthy.

Volume and activity has increased YoY, though still remains below the 2017-2019 pre-pandemic average.

Bank lenders have returned to the market, which is encouraging to observe, however the maturity wall is still piling up with nearly $1T coming due in 2025 including nearly $500bn in Multifamily + Office.

Cap Rates, on average, are still well below an implied level given that the 10-yr UST has settled north of 4%. For Multifamily, buyers today are betting on growth, so they're willing to pay a suppressed Cap Rate in exchange for participating in that future growth. This strategy has risk, and it's difficult to get through Investment Committee, but it is one that generally played out quite nicely during the last cycle (2010 - 2020).

What are your takeaways from the graph below and/or the report if you read through it?