Limon Net Lease Group

Marcus & Millichap Research Services

Will Black Swan Events Derail the FED & CRE Outlook

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The Impact of Recent Events on the U.S. Economy ​

Recent Global Events Are Creating Economic Pressures ​

  • Hurricane Helene struck the southeastern U.S. in late September, and may become one of the costliest disasters in history ​
  • Military escalations in the Middle East are lifting oil prices, leading to inflation concerns ​
  • Elevated oil prices historically precede economic downturns ​

The ILA Port Strike Disrupts U.S. Supply Chains​

  • U.S. East Coast and Gulf Coast dockworkers began a strike on October 1st, halting inbound and outbound shipping at 36 ports ​
  • Weekly economic losses are estimated between $4 billion and $7 billion, impacting various industries ​
  • The strike affects U.S. imports and exports, risking domestic food and manufacturing supply chains ​

Port Strike Could Complicate Fed Decisions And Impact CRE ​

  • The Fed may face a tough choice between lowering rates to prevent a recession or holding them steady to keep inflation under control ​
  • A prolonged dockworker strike could shift container traffic to the West Coast, boosting industrial space demand in certain regions ​

GDP as of April 2024; Export value as of 2023
Sources: Marcus & Millichap Research Services, World Population Review, IMF, CIA ​

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Investors’ Top Question About Interest Rates

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Fed’s Cut Transforms the CRE Investment Landscape ​

Fed Cuts Rates by 50 Basis Points ​

  • The 10-year Treasury rose after the cut, but other Treasury rates continued to decline ​
  • Different Treasuries may diverge in the short-term, but tend to move in the same direction over a longer time span ​
  • Wall Street already priced in the Fed’s 50bps cut ​

Wall Street Expects Significant Cuts Moving Forward ​

  • Investors eyeing for a recession, but most economic indicators remain positive ​
  • Federal Funds rate projected to drop to 3% by late 2025 ​
  • Barring a recession, declining rates should provide tailwinds for CRE investment activity. ​

CRE Market Has Shifted Gears ​

  • Rate cut expectations spurring aggressive bidding activity in several sectors and regions ​
  • Many institutions are beginning to reengage with CRE ​
  • Cap rates may begin to compress, but this depends on strong investor demand and ready access to debt capital ​

​As of September 24​
Fed funds rate forecasts based on midpoint of highest probability target range ​
Sources: Marcus & Millichap Research Services, Federal Reserve, CME Group​

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The Positive Forces Shaping the Horizon Perspective

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How will Demographics Influence the Economy and CRE? ​

Long-Term Focus Is Paramount For Success ​

  • Real estate typically involves a 5 to 10-year hold period ​
  • Short-term trends are impactful, but longer-term strategies often deliver more reliable results ​
  • Demographics are key in shaping investors’ long-term outlooks ​

Demographic Changes Shape The Economy ​

  • Pandemic accelerated Millennial-driven migration from cities into the suburbs, fueling demand for suburban real estate ​
  • Millennial and Gen Z generations both maturing into higher-earning age groups​
  • Less of the older generations are leaving the workforce, keeping their high incomes as a driver of economic growth ​

Aging Population Will Improve CRE Demand Drivers ​

  • Earnings growth among Millennials and Gen Zs will drive consumption up over the next five years ​
  • Retail, industrial, self-store, hotels and housing should all benefit from the positive demographic lift ​

​*Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics ​

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Capitalizing on the FED’s Next Move

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How the Debt Landscape Presents Opportunities for Investors ​

Debt Liquidity Solid Across Most CRE Sectors And Markets ​

  • Fixed CRE mortgage rates facing downward pressure due to lower treasury yields and tighter lender spreads ​
  • Loan-to-value and debt service coverage ratios remain stable ​

Lenders Are Engaging In CRE Transactions ​

  • Banks and credit unions increasing lending volumes​
  • CMBS bond investors showing healthy appetite for lending, especially for hospitality transactions ​
  • Life companies actively focused on low-leverage deals with strong sponsors ​

Conditions Are Ripe For Investors To Act ​

  • Election may stall Fed’s decision to cut rates in late 2024 ​
  • Interest rates have come down and cap rates are still elevated ​
  • Investors likely working with a relatively narrow window where cap rates and interest rates align to clear the market ​

*Through September 11​
Sources: Marcus & Millichap Research Services, Federal Reserve​

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Job Market Strengthens CRE Investment Outlook

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How the Labor Market Will Influence CRE Performance​

Federal Reserve Preparing To Lower Interest Rates ​

  • According to Wall Street, the Fed is anticipated to reduce interest rates by 25bps to 30 bps in September ​
  • Downward jobs revision and rising unemployment leading the Fed to place more emphasis on supporting the labor market​

Labor Market Is Cooling, But Not Signaling A Recession ​

  • Rising unemployment reflects the slowdown of a previously-overheated labor market, rather than an economic downturn ​
  • Labor market among middle-aged and college-educated population remains tight ​
  • Despite revision, hiring still on par with pre-pandemic norms ​

Sustained Economic Growth Will Support CRE Space Demand​

  • Future rate cuts will help economy achieve a soft landing​
  • Wages climbing a steady pace, supporting retail sales growth that should flow into demand for retail and industrial spaces ​
  • A healthy level of job growth will fuel household formations, bolstering consumer needs for apartments and self-storage ​

*T-12 through March after BLS 3Q revision; Revision applied to 2024
Sources: Marcus & Millichap Research Services, U.S. Census Bureau​

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Single Family Housing Influencing CRE Outlook

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How the Single-Family Housing Market Influences CRE​

Single-Family Housing Market Remains Tight​

  • Home sales surged from 2020-2021, pushing up values ​
  • Fed hikes lifted mortgage rates, but home prices did not fall​
  • Limited for-sale supply keeping home prices on upward path ​

Housing Supply Shortage is Persistent ​

  • Estimated housing shortage of 3.5 to 5 million units as of 2021​
  • Population growth and increased prevalence of single-person households continue to bolster needs for new housing​

Rental Needs Growing, Will Flow Into CRE Space Demand ​

  • Monthly cost gap between homeownership and renting at a record high​
  • Given a soft-landing and a growing young-adult population, pent-up housing demand should accelerate household formations​
  • As new households are formed, they bolster retail consumption, storage space needs and demand for industrial space ​

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

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