Marcus & Millichap Research Services

WHY THE 2024 ELECTION IS UNLIKELY TO IMPACT LENDING RATES ​

Federal Reserve Does Not React To Politics​

• Historically, The Fed has both raised and lowered the overnight rate leading up to elections​
• Data suggests interest rates will move independently of the election year​

No Signs Of Political Bias Either​

• The Federal Reserve has not favored one party over another when making rate determinations​
• The 10-year treasury yield also behaves independent of election cycles​

When Could Rates Go Down?​

• Before 2000, interest rates were typically even higher than the are now, suggesting we are close to what many long-time investors consider normal​
• The market will likely adjust to the interest rate environment before we see substantial rate cuts​

*Through September 13​
Sources: Marcus & Millichap Research Services, Federal Reserve​

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NEW LABOR MARKET DATA STRENGTHENS LIKELIHOOD OF SOFT LANDING​

Labor Market Growing, But At Subdued Pace​

• The U.S. is on pace to add more than 2 million jobs in 2023, a slower rate than last year​
• Slowed employment growth will help keep wage growth in-line, aiding the Fed’s inflation fight​

CRE Outlook Boosted If Soft Landing Achieved​

• CRE absorption is strong during periods with this year’s level of job creation​
• A soft landing would diminish upward pressure on interest rates, while raising consumer and business confidence, tailwinds for CRE demand and investment​

Federal Reserve Actions To Drive Economic Outlook​

• The question is, will wage growth and inflation fall quick enough for interest rates to stop rising in 2023​
• Wall Street does not expect a rate hike at the next Fed meeting, but is split on the outlook for EOY 2023​

*Sources: Marcus & Millichap Research Services, BLS​

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WHY GEOGRAPHIC DIVERSIFICATION IS CRITICAL TO CRE INVESTORS?​

Natural Disasters Increasing in Frequency and Severity​

• The number of natural disasters has been increasing steadily over the last few decades​
• The U.S. averaged 20 “Billion-Dollar-Plus” natural disasters per year for the last three years​

Diversification Can Mitigate Risk​

• Geographically diversifying a real estate portfolio reduces risks of an entire portfolio being impacted by one event​
• While insurance may mitigate the hard costs of a disaster, soft costs like time, short-term cash flow and the challenges of navigating the insurance claim process will still be incurred​

Natural Disasters are Pushing Insurance Rates Higher​

• Apartment insurance rates increased by 33% last year – but not all areas have been affected the same.​

*Through 2Q​
Sources: Marcus & Millichap Research Services, RealPage, Inc.​

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WHY SOME INVESTORS ARE ON THE SIDELINES WHILE OTHERS SEE OPPORTUNITY​

Expectation Gap Shrinking But Still A Factor​

• In general, buyer sentiment is that CRE pricing is still too high in the summer of 2023​
• Sellers that need to act are moving to the market pricing to secure deals​

Significant Number Of Deals Are Penciling Despite Gap​

• Nearly 30,000 CRE transactions occurred in the first half of 2023, highlighting solid liquidity during the slowdown​
• Smaller deals involving private investors have made up a higher percentage of first half deals in 2023​

What Opportunity Are Buyers Seeing?​

• Investors are tracking demographic trends, and some are determining the future gains outweigh the short-term rise in financing costs​
• Today’s climate reinforces the importance of analyzing property and market trends when making decisions​

*Through 2Q​
Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.​

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IS A CONSUMER DEBT CRISIS ON THE HORIZON?​

Media Focusing On Record High Consumer Debt​

• Total household debt in the U.S. reached a record $17T in July, while revolving credit surpassed $1T ​
• Inflation adjusting theses figures, brings consumer debt back into perspective​

U.S. Economy More Productive Than Ever​

• Debt levels have risen, but so have incomes and GDP, increasing consumers ability to make debt payments​
• Consumer loans as a percentage of GDP are trending lower than they have in the past 2 decades​

Debt Unlikely To Hold Back Demand In 2023​

• If consumer confidence continues its upward pace, consumers willingness to spend and form new households should not be restricted by debt burdens​
• Banking turmoil, Fed decisions, or any number of events could shake confidence, but the current trend is positive​

*Through 1Q​
Sources: Marcus & Millichap Research Services, Board of Governors of the Federal Reserve System​

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INFLATION, SENTIMENT, AND THE IMPACT ON COMMERCIAL REAL ESTATE​​

June Inflation Trending Higher, But Trend Is Positive​

• Headline inflation rose to 3.2%, but the more important Core CPI number fell​
• The housing component of CPI remains elevated, but is forecasted to fall, aiding the current trend further​

Brightened Outlook Boosting CRE Space Demand​

• Confidence and sentiment measures for consumers, small businesses and CEOs are all rising in July​
• Absorption is likely to rise across products if recession fears keep decreasing and individuals feel optimistic​

What To Expect in 2H 2023​

• Wall Street is expecting the Fed to keep overnight rates flat through the December meeting​
• If positive moment is sustained, it offers a strengthening CRE outlook

*Through 2Q; Small Business Optimism through July​
Sources: Marcus & Millichap Research Services, University of Michigan, The Conference Board, NIFB ​

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