Overall, “the resilience of the U.S. economy has surprised many,” said economist Ray Perryman with The Perryman Group. A year ago, the headlines were predicing a recession. “But it never happened,” Perryman said.
More jobs coming online and GDP growth should be welcome news. But according to a recent CBRE article, “it validates the Fed’s cautious approach to cutting rates.” Perryman and other experts told Connect CRE that job growth is just one factor the Federal Reserve examines when determining when – and whether – to cut the Effective Federal Fund Rate (EFFR).
But where did those jobs come from? Severino explained that jobs over the past year came from key categories, including education and health services, leisure and hospitality, and government. In recent months, “professional and business services are starting to generate more jobs,” he added.
According to Barkham, the larger picture involves real income gains, which drove robust consumer spending. This, in turn, drove the higher Q4 GDP. “We think this level of growth isn’t sustainable,” he said. “But continued high-productivity growth would mean the economy could grow quickly without inflation.”
Examining the CRE Impact
The CBRE article said there will be a reduction in the EFFR, possibly as soon as May. “This will be necessitated by cooling inflation, which will increase real interest rates, heightening risks to economic growth,” the article noted.
The article also stated that as the 10-year Treasury yield falls to 3.6% by the year’s end, it should increase commercial real estate investment activity during H2 2024. Though leasing should be resilient, “hybrid work and an uncertain business environment will likely keep occupiers cautious in 2024,” the article concluded.
Barkham provided additional insight, explaining that multifamily benefits from a healthy consumer sector, as it means people can take on more rental obligations. Spending consumers also drive industrial, which ships goods to retail stores. “Strong consumers have also boosted bricks and mortar retail, which has a shortage of Grade A space,” Barkham said.
Still, Perryman said that “a substantial volume of real estsate loans will need to be structured in 2024,” which could be a challenge given both the interest rates and occupancy issues, especially on the office side.
Severino said when the Fed starts to ease its stance, CRE capital markets’ volume and pricing should pick up. He also indicated that appreciation returns should move into positive territory. “That likely won’t occur immediately but should build as the year progresses,” Severino added.
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