By Erika Morphy, Globe St., November 16, 2015 WASHINGTON, DC—This weekend, it seemed, the world came apart. On Friday evening, three carefully-coordinated attacks by seven terrorists in Paris, France killed 129 people and injured 352. The country’s borders were closed and a manhunt initiated for one of the suspected perpetrators. A grim and heartbroken President Francois Hollande fiercely declared "We are at war." No one disagreed.The attack on Paris was preceded by a less noticed double suicide attack in Beirut, Lebanon on Thursday night, in which 41 people died and more than 200 were wounded.The Islamic State took credit for both attacks. France retaliated on Sunday attacking Islamic State strongholds in Syria.
The ramficaitions from this weekend will continue to play out in the coming days, weeks, months and unfortunately, probably years as many experts see this assault on Paris as a geo-political game-changer.What Will The Fed Do?The terrorist attacks will just as surely affect the global economy as well. More volatility is in store for the equity and bond markets and global Central Banks' monetary policy could well shift as well. The US Federal Reserve Bank, for instance, cited global uncertainty as one of the reasons for not raising the benchmark federal funds rate at its September 2015 policy meeting. It was the first time in this real estate cycle that it had mentioned this risk.After its October 2015 policy meeting, the Fed said that it was "monitoring global economic and financial developments," according to its Federal Open Market Committee statement. However it also said that -- indeed its lead sentence in the statement was -- "Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace."
That, plus a solid employment report for October had convinced most economists -- 97% of them, according to a Wall Street Journal survey -- that the Fed will begin to raise rates in December.That survey was taken several days before the attacks, though. Now, it is a fair to speculate that, depending on the markets' reaction in the next few weeks, the Fed will hold off on raising rates at its next policy meeting.Indeed, the global markets' reaction on Monday will be closely-watched by everyone, not just the Fed. One can certainly assume that there will be a sell-off and probably a sharp one similar to, if not worse than, the correction in August when it became clear that China's economy was softening.
It's possible, maybe even probably that the markets will return to normal within weeks or months. An interesting analysis in Bloomberg noted that over the past 15 years, global markets have become more resilient to the effects of world terrorist attacks.CMBS, Real Estate ValuationsFor the commercial real estate market the more immediate concern is the commercial mortgage-backed securities market. As the events in August showed, the CMBS market is not immune to equity market volatility.
The past summer, John Levy, president of John B. Levy Co., a Richmond, VA-based commercial real estate investment bank, went to the CMBS market on behalf of a client to finance two properties. It was a routine deal and Levy received routine pricing. But before the transaction could close the equity markets went haywire over China -- and deal-making in the CMBS market completely stopped.
John Levy of John B. Levy Corp. found the CMBS markets shut in August after fears about China took hold.
"Nobody knew what they could sell these loans for," Levy said. "And lenders are not going to put a transaction on the books and hope to sell it when fair weather arrives. Lenders only close on transactions that they think they can find an immediate market to sell in."Levy spoke with GlobeSt.com in October, several weeks before the attacks of this weekend.But his experience is very applicable to what the environment for CMBS financing will probably be in the coming weeks. Performance in the equity markets is not directly linked to the CMBS market, but CMBS spreads are quoted against the swaps curve. So when the swaps market goes crazy, lenders are not inclined to price deals, or for that matter, follow through on commitments for deals that priced earlier.
CMBS market can and do volatile, Levy said -- and the trigger is usually larger US or global economic or macroeconomic events.Another concern is that these events could be the precipitating factor to CRE asset pricing unraveling. There has been an uneasy sense brewing for some time that the property prices are inflated beyond their "true" value -- Fed Chair Janet Yellen said something like that in recent months; various industry surveys have also reflected this fear.And unfortunately, with rates at near zero for so long, the Federal Reserve has no firepower should another crisis unfold.
