“I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come.” (and subprime is contained….)

– Ben Bernanke (March 2006)

Though this is a (albeit late) 4th quarter newsletter its hard not to reflect on what’s going on today. Lets start with that nasty sounding “ (partially) Inverted Yield Curve.” This is not the norm and is usually a symptom of a bigger problem. In reality, yields reflect risk and risk is supposed to increase with time. When this relationship is inverted it usually presages a recession. If this pattern has often repeated itself how come it feels like no one is really acting differently? This question raises many winding answers, impossible to tackle in this medium alone.

However, an interesting topic to explore is should you go fixed vs. floating? As with many things the answer is, it depends on your micro and macro view. I would argue that if your crystal ball is warning you of stagflation (as mine is) than you want to go fixed. Stagflation is the worst of both worlds where you have high inflation and low output. In a stagnant environment wage growth cannot and does not keep up with rising costs. This puts more risk on value add deals or those development that depend on rent trending to pencil out.

The fixed-rate loan shelters you from the rising interest rate environment and protects you from situations where the repositioning play does not get executed on time. There have been many owners that have won the interest rate bet by continuing to float on stabilized assets. Though for the last 40(ish) years there has never been a 10-year period where it was cheaper to be fixed vs float this was before the 1970s stagflation era. For the risk averse or those with perfect future vision I recommend fixing. Next (hopefully on time) newsletter I hope to tackle the counter argument of borrowing floating in an inflationary environment for value add / opportunistic deals.

– David Eyzenberg (Adjunct Professor at NYU Schack Institute of Real Estate & University of Miami Herbert Business School)