The yield curve, a long-watched economic indicator, is finally showing signs of returning to normal. For over a year, we’ve seen an inverted yield curve, with the two-year Treasury yield running higher than the 10-year yield — historically a warning of a looming recession. Yet, despite these signals, a recession has yet to materialize.
The inversion first occurred on July 5, 2022, and remained one of the most extended inversions on record. Now, as the curve starts to normalize, the big question is: does it still matter? Over the past 2 weeks, we’ve seen some back-and-forth movement in the yields, with both the 10-year and 2-year hovering around the same levels. In some instances, the 10-year edged slightly above the 2-year, hinting at a shift away from inversion.
So, what does this movement indicate? In short, investor expectations.
Markets are pricing in interest rate cuts from the Federal Reserve as early as this year. While some argue that the end of inversion could signal a recession, others suggest we might still be on track for a soft landing. The reality is no one knows for sure. The yield curve, while historically a reliable predictor, is not a guaranteed cause of economic downturns.
This leads us to what these shifts could mean for the multifamily marketplace. In an environment of economic uncertainty, investors often seek stability, and multifamily real estate continues to offer an attractive balance of yield and security. Should the Federal Reserve begin cutting rates, we might see a positive impact on the lending environment, making capital more accessible and cheaper. This, in turn, could support continued activity in multifamily acquisitions and development, as lower borrowing costs improve project underwriting and cash flow projections.
However, we can’t ignore the potential downside. If rate cuts signal the onset of a recession, demand in some rental markets could soften. Luxury or Class A properties might see tenants downsizing to more affordable options. Conversely, Class B and C properties, which tend to serve a more economically resilient tenant base, may continue to experience steady demand.
It’s also worth noting that despite the economic uncertainty, multifamily investments benefit from the long-term trend of housing undersupply. Even if a recession does occur, the structural need for more housing units will remain a driving force in the market, supporting rental demand over the medium to long term.
While the yield curve’s normalization could mean different things depending on how interest rates and the economy move, multifamily real estate remains a strong asset class for investors when looking at a long-term arc. Whether rates decline or the economy slows, the demand for rental housing is likely to persist, making it a solid hedge against both inflation and potential downturns. We’ll continue to monitor these developments closely and evaluate how they affect our investment strategies.
