Experts predict market will grow with the flow.

In spite of a yield curve whose topographical equivalent is starting to look something like the Bonneville Salt Flats, real estate experts are predicting economic conditions that bode well for the strength of the commercial leasing and real estate investment sales markets.

Healthy job growth in the opening quarter of 2006 combined with impressive productivity, which has prevented wage inflation, have been evidence that key real estate metrics, such as vacancy and rental rates, will continue to improve in the months ahead. Commercial real estate pricing, which has been at peak levels in recent years, could also benefit from the tightening of such metrics, as they would likely improve the cash flow for commercial assets, a key factor in determining their value.

"People are watching the yield curve closely because when it is flat to slightly inverted it indicates a slowdown," said Janice Stanton, a senior managing director in Cushman & Wakefield's capital markets group. "But with that said. consumer confidence came out recently at a four-year high and the jobs number was 243,000 for February. Core CPI is 2.1% and CPI is 3.1%, which are good numbers. If you have to look at the economic news, the glass is half full."

Flat yield curves, considered a rare phase in the economic cycle, do generate some cause for concern however.

As of last Thursday, two days after the Fed bumped up interest rates a quarter point for the 15th straight time to 4.75%, the six-month Treasury was at 4.83%, actually two basis higher than the 10-year Treasury.

Inverted yield curves historically have been harbingers of recessionary times ahead. An inverted curve, where long-term interest rates are actually less than short-term rates, indicates the market's expectation that interest levels are poised to drop, an action the Federal Reserve sometimes initiates by lowering short term rates in a effort to stimulate economic growth. The last time the yield curve inverted was in 2000, when it correctly predicted a recession just a year later.

A two basis point difference hardly constitutes a true inversion, but that spread could grow if the Fed continues to raise short-term rates. Many economic experts predict the Fed will do just that from the statement it released after its meeting last week. "The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the Fed's statement said. "In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

At the end of March 2005 the six-month Treasury rate was 3.17%, roughly two percentage points lower than it is now, while the 10-year was 4.6%, just 20 basis points lower. Essentially, the short-term rate is growing at a faster pace than the more stable 10-year rate meaning that if this ratio persists, the gulf, which has been shrinking, could again widen, this time with short-term rates on top.

Some argue that even if this scenario does play out, it won't necessarily mean a repeat of the economic slowdown the economy experienced after the last inversion.

Inverted yield curves effectively create a shortage of capital because many lending institutions, which borrow their money at the rate determined by the Federal Reserve and then lend it out at long-term rates can't generate enough of a spread on which to profit. But Peter Kozel, an executive managing director of research and real estate strategy at Newmark Knight Frank, argued that the economy is so infused with a global supply of capital from a cornucopia of institutional investors and foreign governments, it is nearly impervious to a lack of supply from any one particular group of capital providers.

"China has almost a trillion dollars to invest," Kozel said. "There are many other avenues of capital than there were 20-30 years ago when banks were almost the sole lenders."

Date       1 mo   3 mo   6 mo    1 yr     2 y    3 yr

03/01/06   4.45   4.60    4.75    4.74    4.71   4.68
03/29/06   4.69   4.63    4.83    4.83    4.82   4.81
03/01/05   2.55   2.75    3.00    3.20    3.59   3.76
06/01/05   2.79   2.97    3.12    3.25    3.50   3.55
09/01/05   3.35   3.48    3.62    3.66    3.72   3.80
12/01/05   3.99   3.97    4.32    4.36    4.45   4.44

Date       5 yr   7 yr   10 yr   20 yr   30 yr

03/01/06   4.63   4.60    4.59    4.74    4.56
03/29/06   4.79   4.79    4.81    5.02    4.84
03/01/05   4.02   4.19    4.38    4.80    N/A
06/01/05   3.63   3.74    3.91    4.31    N/A
09/01/05   3.85   3.91    4.02    4.31    N/A
12/01/05   4.45   4.47    4.52    4.83    N/A

Federal Reserve data on Treasury rates
indicates flat yield curve.