The CRE Macro Outlook: Bad News, Good(ish) News
As mentioned in another Weekender article, commercial real estate’s financial side is taking a hit. Added to this, analysts brushing off their macro crystal balls for the remainder of the year continue cautious in their statements.
Cushman & Wakefield’s “U.S. Macro Outlook” forecasts a mild recession to start in 2023. The report also indicated that warning signs are in play that “signal slowing parts of the economy.”
Meanwhile, data company LightBox indicated that the “CRE industry is on alert for distress,” and though recession concerns are shrinking, they do remain.
But even with the current uncertainty and volatility, the Cushman & Wakefield and LightBox analysts aren’t focusing solely on doom and gloom in the upcoming year. Certainly, capital markets have been daunted by the ever-increasing boost in the Federal Reserve’s Effective Federal Funds Rate. And inflation continues to remain a sticking point. Still, “assuming our base-case scenario plays out, and assuming the Fed begins to cut rates in 2024, we expect capital markets to bounce back quicky,” the Cushman & Wakefield report said.
Furthermore, the EFFR’s 25 basis point increase in February 2023 “helped ease some concerns and gave the market confidence that the aggressive 75 bps hikes of 2022 may be in the rearview mirror,” the LightBox researchers added. “While the economic pain is not over, this was a positive step toward normalcy.”
To that end, both companies suggest keeping an eye on various trends in the coming year, including the following:
Pricing reset. The LightBox analysts indicated that a pricing reset is on its way. “With a potential price correction looming, a bid-ask spread has developed between buyers and sellers, with each side trying to maintain its footing,” the analysts added. Repricing could be as dramatic as 20% to 30% for office space, Lightbox went on to say.
Trifurcated office sector. The office sector has continued to struggle since the pandemic. Cushman & Wakefield analysts indicated that the “age of trifurcation is here.” In other words, new construction and office space catering to hybrid workplace strategies are in high demand. This is not so much the case for older Class B and Class C properties.
Multifamily remains strong . . . but. LightBox analysts said that “the multifamily sector remains a top asset class and continues to benefit from strong demand drivers.” Meanwhile, Cushman & Wakefield pointed out that new supply is the main theme for the sector. Still, multifamily isn’t immune to issues like increasing capital costs, LightBox noted. Apartment sales are slowing due to downward pressure on rents, income and values. On the supply side, “an economic recession—even a mild one—should give pause to further new supply, especially if development costs remain elevated in a high interest rate environment,” Cushman & Wakefield analysts said.
Even with the industry’s current and projected challenges, LightBox and Cushman & Wakefield presented mixed hope. “The outlook is balanced by resilience in certain sectors and more challenging headwinds in others,” according to the Cushman & Wakefield analysts.
Added LightBox: “While there is plenty of long-term optimism and capital available for placement, the path forward will require plenty of perseverance and fortitude.”