Key takeaways: Semiannual Market Update webinar for real estate

Macroeconomic update: U.S.

• Banks are forecasting 2022 year-over-year GDP growth between 3.5% and 4%
• Unemployment is back down to early 2019 levels after a peak in April 2020
• Key inflation indicators are 2.5-3.5 times higher than the 2% target set by the Federal Reserve
• The market is pricing in up to seven rates hikes in 2022
• The Fed plans to complete tapering by March 2022
• Forward curves have had several significant moves over the last two years

Macroeconomic update: EU and UK

• Strong rebound in GDP in 2021 faltered as policy responses to omicron impacted most countries
• There is still an expectation of materially above trend growth in 2022 at around 4.7% for the U.K. and 4.2% for the EU
• The EU remains in fiscal expansion mode which could be a growth multiplier
• U.K. unemployment remains low at 4.1% even after government furlough support was withdrawn
• EU unemployment is at 6.5%, but this masks some large variances across the region
• Inflation is the major macro story — higher energy prices make up the largest component of the increase; stripping out energy, core inflation is still at very high levels
• The question is whether the higher inflation will persist through 2022 or start to reduce in the second half of the year
• Markets are very concerned about inflation and this has been reflected in bond yields — using the 10-year U.K. gilt and the 10-year German bund as benchmarks — which have moved up materially in only a few months
• The Bank of England raised rates again last week, and while the ECB maintained interest rates, the messaging from both central banks provided some shocks

Hedging considerations and strategy

• Interest rate caps have become significantly more expensive in the current rate environment
• Rising rates mean that existing interest rate caps may have residual value that borrowers can often recoup when terminating existing loans
• Of the attendees planning to change their mix of fixed- and floating-rate debt, 79% plan to take on more fixed-rate
• Cross currency hedging can lock-in favorable repatriation rates for certain pairs/directions

IBOR transition

• SONIA transition is complete (for the most part)
• Some have adopted synthetic GBP LIBOR, which is Term SONIA plus the ISDA-fixed credit adjustment spread (11.93 bps for three-month tenor)
• Banks are no longer offering USD LIBOR-indexed loans or hedges, except for extending hedges on debt that pre-dates 2022
• Interest rate hedges do not necessarily fall back to SOFR at the same time as the underlying loans do; borrowers should review loan documentation and discuss this internally

As we look out to the remainder of 2022, we asked our webinar attendees what their top-priority issue will be. Nearly two-thirds of attendees are reviewing their investment and debt financing strategies, while 26% are focused on investments in technology and data management. If any of these topics resonate with you and your firm, please reach out to your Chatham contact to discuss further.