Valuing CRE - WACO

In the world of capital markets, clarity is often fleeting — and today, it feels downright elusive. The Federal Reserve’s latest June dot plot offered little in the way of certainty. While the median projection sees the Federal Funds Rate in the mid-3% range by the end of 2026 , the dispersion among voting members is striking. Seven members predict no rate cuts in 2024 , reflecting just how divided the committee remains in the face of conflicting data. This latest update marks a 25-50 basis point shift downward from May , but the overarching theme is one of caution, not conviction. That sentiment is mirrored in the economic projections. Core PCE inflation , the Fed’s preferred inflation measure, is now expected to end 2025 at 3.0% , 30 basis points higher than earlier forecasts. Meanwhile, real GDP is forecast to slow from 2.3% in Q4 2024 to just 1.7% in 2025 — another sign that the lagged effects of monetary policy are expected to begin to show. At the same time, the Fed’s balance sheet has shrunk dramatically, from a peak of $9 trillion in April 2022 to just $2.3 trillion today . That quantitative tightening, coupled with a lack of consistent inflation suppression, leaves both equity and bond markets vulnerable to further volatility. This all feeds into an uncomfortable truth: rates are likely to remain higher for longer , and the market is struggling to price that reality. The VIX index , a 30-day forward-looking gauge of volatility in equities, is trending higher. When volatility rises even as indices fall, credit spreads widen , liquidity tightens, and financing risk surges. For commercial real estate investors , this has enormous implications. As we explored in our recent article on CRE Price Discovery , the market remains in flux. The bid-ask spread in real estate is still somewhat wide, and most transaction activity today is being driven by maturing debt — not opportunistic investments banking on future growth. This means valuations are being forced downward, especially for assets that were purchased or refinanced at ultra-low rates in 2021–2022. Consumer behavior is also in transition. Household formation is slowing, and personal savings rates are slowly ticking up although they are significantly down from longer term averages – which could reflect folks bracing for economic turbulence. U.S. household formation currently stands at 1.058 million, down 7.68% from last month’s 1.146 million and down 47.73% from 2.024 million a year ago. Looking globally, demand for U.S. Treasuries remains a critical economic indicator that has trickling effects on the economy . A strong bid-to-cover ratio — like the 2.67x seen at the June 11th 10-Year Treasury auction , with nearly 88% of bids from foreign banks — is encouraging. It suggests continued faith in U.S. fiscal credibility and currency strength despite market apprehensions in our strength, such as the US credit rating being downgraded by Moody’s. This equilibrium is rather fragile. Should the U.S. continue to run massive budget deficits with a debt-to-GDP ratio north of 120% , investors may begin to demand higher yields — or worse, seek refuge in alternative stores of value. Gold is one such store. The World Gold Council recently reported that 76% of central banks expect to increase their gold holdings over the next five years , up from 69% in 2023. This flight to real assets reflects growing concern about the long-term value of fiat currencies — and a desire to hedge against systemic risk. The Bottom Line  Rates are likely to remain high through 2025 and into 2026 Inflation remains persistent but progress has been unclear Growth is slowing, and volatility is rising Real estate is repricing around debt maturity events Global capital is shifting cautiously, looking for safety At Alpha Equity Group, we believe this is a time for discipline, not risk-taking. We’re staying patient, watching the data, and investing defensively — focusing on secured debt positions and capital preservation. While others chase uncertain upside, we’re building long-term value through downside protection while we wait out the convergence of dozens of factors completely outside our control.

When markets break from fundamentals, the prudent real estate investor doesn’t chase noise — they reposition around truth. And the truth is this: we are entering a prolonged period of macroeconomic and geopolitical volatility . The world is realigning, and capital is responding accordingly. Global central banks are moving away from the U.S. dollar. According to the World Gold Council, 76% of central banks plan to increase their gold reserves — a jump from 69% last year — citing crisis protection, inflation hedging, and diversification as key drivers. This reflects a growing caution around U.S. fiscal policy , rising deficits , and ballooning national debt , now over 120% of GDP . Meanwhile, money market fund balances are climbing — a signal that institutional and retail investors alike are parking cash on the sidelines. These short-term investment vehicles offer safety and a yield that closely tracks the Fed Funds Rate. In other words, investors would rather earn 5% in cash than take risk in longer-duration assets, treasuries, or swinging equities. These trends are further complicated by geopolitical uncertainty. Ongoing wars, potential tariff escalations , and questions around U.S. fiscal leadership all introduce headline risk. Should unemployment rise , or growth falter , the Fed may face pressure to intervene — but its tools are limited. Cutting rates could re-ignite inflation. Raising taxes or cutting spending is politically unpopular. The Fed is cornered, managing debt service costs, inflation expectations, and political realities simultaneously. For CRE investors, this creates both risk and opportunity. Real estate pricing is driven by capital flows, leverage, and the cost of debt . When long-term Treasury rates rise , the “risk-free rate” increases — and with it, lenders widen their spreads to reflect perceived risk. Even when treasuries fall, spreads going higher can keep all-in interest rates higher. Spreads are higher for construction loans, transitional assets, and tertiary market, reflecting in lower asset prices. The net effect is simple: lower loan proceeds and higher cost of capital . As a result, buyers must lower offers to meet equity return thresholds . We are already seeing this play out in real time. In markets where price discovery is finally happening , bids are falling, and assets are being marked to market — especially those with near-term debt maturities. Until this repricing completes and stability returns, we believe it is wise to lean into debt rather than chase speculative equity returns. Debt Offers Strategic Advantages Right Now: Senior positioning in the capital stack offers downside protection Current yields are attractive , often exceeding return thresholds without relying on appreciation Shorter durations allow us to stay nimble as the market evolves And we can structure loans with sponsor-friendly terms , aligning ourselves with developers who need flexible capital during this transition period At Alpha Equity Group, we’re also putting our own capital to work on the equity side of the deals we know best — infill residential development. But we are doing so carefully, underwriting with stress-tested assumptions, and leaning on our operational expertise. As we’ve seen in prior cycles, market dislocation creates fertile ground for investors . With uncertainty around every corner, we see this moment not as a challenge, but as an opening — a window to preserve capital, generate yield, and position for long-term outperformance once growth does come back. What to Watch: The yield curve : steepening curves may signal higher inflation and longer-term rate risk U.S. bond auctions : demand strength, especially from foreign investors, impacts long-term borrowing rates. The US is expected to start buying treasuries and bonds again in 2026, increasing its balance sheet again after rounds of tightening alongside the recent rate hike cycle. Credit spreads : widening spreads reflect rising risk aversion and lender caution Geopolitical escalation : new conflicts or trade wars can drive capital away from U.S. assets and toward gold or other alternatives Fiscal response : keep an eye on Trump-era tax reform 2.0, tariffs, or large-scale spending plans heading into the election cycle. This can affect bets on future inflation, bonds, capital availability, and CRE prices. In short, we are in a time of reordering — politically, economically, and monetarily. Investors who embrace this shift and position accordingly will be well-rewarded. We’re not just investing in the market we have — we’re preparing for the one that’s coming.  That’s why we’re taking a conservative credit-first approach , with upside optionality where it makes sense, and defense where it matters most.