• Have inflationary pressures started to abate?
• How will the Fed respond in the first few months of 2023?
• Which economic signals should CRE investors keep their eyes on?

Sources: Marcus & Millichap Research Services

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Fed Slows The Pace Of Rate Hikes

• As expected, the Federal Reserve raised the overnight rate 50 bps to a lower bound of 4.25%, following 4 consecutive 75 bps lifts
• Chairman Powell suggested that the terminal rate may have risen, but set expectations for a slowing pace of increases over the course of 2023

Why Is The Fed Easing Rate Movement

• While inflation of 7.1% is well above the 2% target, this figure has fallen 110 bps since September
• Other key indicators like housing, car prices, and gas prices slipped from recent peaks towards the end of 2022

What This Means For CRE Markets

• Slower, smaller rate increases will reduce uncertainty and give the market time to recalibrate. That will help narrow the buyer/seller expectation gap.
• If the Fed continues down the path of smaller hikes in 2023 and inflation manages to ease, we could see buyer competition for assets heat up quickly.

*10-Year Treasury through December 14, 2022
Assumes one 25-50 bps hike at the FOMC meeting in February 2023
Sources: Marcus & Millichap Research Services, Federal Reserve

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Three Major Trends That Will impact CRE in 2023

Consumer Sentiment Falling Sharply

• The Michigan University Consumer Sentiment Index reached a record low in 2022, but is beginning to rise
• Space demand in the multifamily sector moves closely with consumer sentiment historically, with potential renters making decisions based on their financial expectations

Pandemic-Era Savings Beginning To Pare Down

• Savings, which had ballooned during the pandemic, have fallen by roughly $400B since August, meaning savings could move back to its historic trend in 2023
• While consumer credit is still in a manageable range, dwindling savings could weigh on consumer spending in the next 12 months

The Labor Shortage Continues to Limit Growth

• The gap between job openings and unemployed workers is still at 4.3 million workers, despite the headline grabbing tech layoffs
• The wide array of open positions suggests the country may continue adding jobs in the coming months despite headwinds in the economy, aiding space demand for CRE

*Through November; Job openings through October
Sources: Marcus & Millichap Research Services, BLS

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How Could the result of the 2022 Midterms Impact CRE?

Election Results Cause Split Congress

• Republicans and Democrats will each control one chamber of Congress following inaugurations in 2023
• Split governments generally pass fewer policy changes, resulting in fewer market disruptions

How Do Political Environments Impact CRE Returns?

• Historically, real estate returns rise 10.8% on average during years with split sessions, a 250-bps premium over years with one party control
• CRE returns recorded strong and weak during each party’s control, but have consistently been higher during periods with divided government

Implications for CRE Investors in 2023

• Regardless of the impact of a policy, potential changes impact investors decision making
• Investors could have 2 years to lock in strategies with few policy changes affecting their playbooks

*Through 3Q
Sources: Marcus & Millichap Research Services, NCREIF

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2023 Holiday Retail Sales; Impacts and Trends Affecting CRE

Status of the Consumer Heading Into Holiday Season

• Inflation-adjusted retail sales reached an all time high this October, up 21.3% since October 2019
• Reputable forecasts anticipate a 6% to 8% jump in 2022 holiday sales when compared to last year

Why are Consumers Amplifying Spending?

• Record employment levels and strong wage growth are part of what is driving the consumption bounce
• Above-normal savings levels, up nearly $4.4 trillion since the onset of COVID-19, are also aiding the retail sector

Implications for CRE investors

• Expectations for a record-breaking holiday retail spending points toward boosted performance for discretionary vendors
• Diverse tenant rosters are critical for investors, as a potential recession in 2023 would favor necessity-based retail, like grocery-anchored centers

*Core retail sales excludes auto and gasoline sales
Sources: Marcus & Millichap Research Services, BEA, U.S. Census Bureau

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How October Inflation Numbers Impact The CRE Outlook

Is Inflation Coming Down?

• October CPI data came in lower than expected, with producer prices, steel and lumber costs, and shipping expenses falling as well
• Inflation is well ahead of the target level, and an 8% annual rise in producer prices suggests there are still more costs to be passed onto consumers

Federal Reserve Signals Smaller Rate Increases

• Chairman Powell has been clear in his commitment to achieving 2% inflation
• The Fed is expected to raise the overnight rate 50 basis points in December, then adopt a slower pace of rate hikes in 2023

Potential Impacts on CRE

• More stable expectations are likely to alleviate some of the pressure that has forced investors to recalibrate strategies mid-deal
• Diminished uncertainty can help reduce the expectations gap between buyers and sellers

*Through October
Sources: Marcus & Millichap Research Services, BLS

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