For much of the last two years, the commercial real estate industry has been embroiled in a classic Western-style showdown, popularized in the 1952 film “High Noon.” But instead of a veteran town marshal and a local criminal, this standoff has been between investors and Gary Powell, chairman of the Federal Reserve.

Despite a series of public criticisms from President Trump, the Fed had appeared poised to raise interest rates as many as four times during 2019. Much to the market’s relief, Powell recently decided he wasn’t up for the fight, and seems to have taken a run for the hills instead. His retreat, however, is far from a sign that real estate investors are out of the woods. In fact, there is a growing trend that still poses a significant risk to many equity investments across the country—the capital gap.

The Fed has backed off further anticipated increases for this year, but interest rates are still several times higher than in recent years. While the current 30-Day LIBOR rate of 2.5 percent is not historically high (rates climbed to upward of 5 percent in the mid-2000s), the market is still less than four years removed from rates of less than 0.25 percent. This sharp increase has been especially dramatic with regard to short-term loans, which are typically the main drivers of capital for transitional properties.

All of these factors are causing loan sizing in the debt market to be constrained by underwriting metrics (primarily debt service coverage), driving senior debt loan-to-value ratios to decline. For example, recent data from Trepp shows LTVs on Fannie Mae and Freddie Mac multi-family loans have shrunk significantly over the last five years—from 67.68 in 2014 to just 62.07 this year.

This presents a problem for equity investors, who do not want to dilute their returns by taking up a lower position in the capital stack. As a result, we are witnessing the continued growth of a capital gap in a large number of commercial real estate transactions, posing a risk to equity investors in the process.

This gap is already growing, and is likely to be exacerbated if continual worries from forecasters about the length of the current economic cycle come to fruition. Most economic indicators continue to show improvement, and the prospect of a full-blown recession—which was never a likely scenario to begin with—appears increasingly remote. However, we continue to see predictions similar to those recently issued by Goldman Sachs, which foresees the national GDP slowing to 2.5 percent this year, and as low as 1.5 percent by 2021.

Even as the wider economy remains strong, there are some signs that the lengthy bull run in commercial real estate values is showing serious signs of weakening. In December, Trepp released a report that showed the difference between long-term borrowing rates and average yield on many types of assets is at its narrowest since 2008. Any pronounced economic contraction would only exacerbate this trend, and inevitably lead to lower NOI at the property level—something the Fed may consider likely as it declines to pause further rate increases.

While a market correction does not appear likely in the short-term, banks are behaving conservatively and are coverage constrained, leading to the capital gap. This stands in stark contrast to many previous cycles, and should be heartening for anyone who suffered as a result of the lending crisis of a decade ago.

That same cautious behavior also poses significant risk for many investors as the capital gap grows, particularly those in the equity space who were counting on cap rates remaining stable regardless of interest rate changes. As always, this uncertainty creates major opportunity for alternative capital providers and investors who have been able to accumulate enough dry powder to step in and fill the gap.

While investors may have managed to avoid a full-blown gunfight with a hike-happy Fed, there is still plenty of dust that has yet to settle in a quickly evolving market. As is often the case, it may be those who have been carefully watching the battle from the sidelines who find themselves best positioned to navigate the uncertain waters to come.

Jay N. Rollins is managing principal at Denver-based real estate investment firm JCR Capital. Rollins is the author of Commercial Real Estate Uncovered: A Handbook for Real Estate Finance and Investments.