Research Brief

WILL THE FED CUT RATES IN 2024?​

New CPI Data Shows Inflation Heading Edging Lower

• CPI dropped 10 basis points in April, and is in the 2% range if shelter inflation is excluded
• The Fed’s priority now is to balance the risk of higher rates for longer with the persistence of inflation

What is The Federal Reserves Incentive To Cut Rates?

• Most economic indicators suggest recession risk remains low, meaning the Fed won’t need to cut rates quickly to achieve its growth goals

CRE Markets Are Recalibrating

• Interest rate expectations are biased depending on tenure in the industry
• Investors with the most industry longevity have greater insights into market nuances
• Transaction activity could rise when lenders reduce risk premiums and investors lock in strategies to deploy capita

Sources: Marcus & Millichap Research Services, Federal Reserve

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COULD THE U.S. STILL FACE A RECESSION?​​

If Federal Reserve Holds Rates High For Too Long…​

• The Fed is continuing to hold rates between 5.25% and 5.50% ​
• Rates need to stay high long enough to control inflation, but holding too long could spur a recession​

Indicators Do Not Currently Suggest High Recession Risk​

• Historically, yield curve inversions have served as good predictors of most impending recessions​
• However, the unique economic disruptions and stimulus injection could make the current inversion less indicative​
• Another indicator, unemployment rate, currently suggests we do not face an imminent risk of a recession​

Recession Could Be A Mixed-Bag for CRE investors​

• A recession could slow household formation and consumer spending, weighing on space demand for various CRE properties​
• It could also push interest rates down, helping revive CRE deal flow following a period of investor recalibration to the recession​

*Sources: Marcus & Millichap Research Services, BLS​

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WHAT 1Q 2024 CRE DATA MEANS FOR INVESTORS​

Apartment and Industrial Vacancy Softens Slightly​

• High construction levels are leading to mild apartment and industrial vacancy increases to start the year​
• Apartment demand is still positive, and both industrial and apartment outlooks for the next 3-5 years are bright​

Multi-Tenant Retail is Having Its Moment in the Spotlight​

• Multi-tenant retail assets absorbed over 1.4M square feet in the first quarter, keeping vacancy near record lows​
• Strong performance within the asset class at a time when most CRE types are seeing softening bodes well for retail investors​

Lack of Space Demand Drop Off to Boost Next Cycle​

• Slight softening as record construction pipelines finalize suggests demand will be heightened once the rate tightening cycle plays out and construction levels diminish​
• As discussed in last week’s video, if CRE fundamentals maintain current levels, investors could regret not deploying more capital this year​

*Forecast​
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RealPage Inc.​

DID REAL ESTATE MARKETS ALREADY REACH THE BOTTOM OF THE CYCLE?​

Private and Institutional Investors Are Thinking Differently​

• While many institutional investors believe CRE sales prices will contract further, many private investors believe the market is turning​
• If institutions wait on the sidelines, private investors can benefit from reduced bidding for acquisitions​

Should Investors Adjust Portfolios For Next Cycle​

• Investors may sell performing assets to shift into markets and asset types and properties with greater upside potential​
• This could mean executing a 1031 exchange to get capital into stronger growth-oriented properties or market​

Pricing Beginning To Rise For Some Markets and Property Subtypes​

• Average pricing is down from peak by between 5% and 30% for major property types, but certain segments appear to be back on the rise​
• Will investors look back at 2024 and wish they’d bought more?​

*Sources: Marcus & Millichap Research Services, Real Capital Analytics​

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IS “FED-CENTRIC” ANALYSIS MISSING THE POINT?​

U.S. Economy Strengthening​

• Numerous economic drivers are delivering positive momentum ​
• Investors have become too focused on interest rate dialogue and may be missing the bigger picture. While interest rates are important, they shouldn’t overshadow supply and demand​

Economy Will Drive Property Performance​

• Corporate profits, employment, consumer sentiment and retail sales are all climbing​
• While investors may be focused on rates, positive economic trends and sentiment will boost CRE space demand​

CRE Outperforms Over The Long-Term​

• While the quick pace of rate movements shocked CRE trading, investment strategies need to adapt to the current climate​
• The strong economy could be a double-edged sword. It may preclude substantive rate cuts, but could also drive strong space demand​

*Trailing 3-month average through April​
Sources: Marcus & Millichap Research Services, University of Michigan​

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• The challenges CRE investors still face
• Is sentiment beginning to shift?
• Why talking action today may be the best option

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