Written by: Harrison LaHaie
What’s in the News
The Federal Reserve raised rates by 75 basis points for the second consecutive meeting. GDP numbers showed negative growth for the second quarter in a row. A recession has not yet been declared, due to the strong job numbers from the past quarter. Housing starts declined 2% in June, while existing and new home sales declined 5.4% and 8.1% respectively. Personal income increased 0.6% in June but fails to keep up with inflationary pressures, putting more constraint on consumers.
Economic Outlook for CRE
Rising rates put ever-increasing pressure on commercial real estate. Increased financing costs have created a bid/ask gap. Properties with floating rate debt may be forced to sell. The multifamily sector has seen rent growth slow this year compared to incredible growth last year, as vacancy rates have ticked up about 1% since last fall. However, research recently showed that the U.S. needs 4 million new apartments in the next 13 years. Long-term, the fundamentals for multi-family are sound. Industrial remains strong despite harsh economic conditions. Experts expect rents to increase due to supply being unable to keep pace with demand. Office recovery remains difficult, as large markets with long commutes struggle to get employees back in-person.
Looking Ahead
The question is no longer if a recession will be declared but when. With the economy shrinking for two consecutive quarters, it is unlikely that the labor marker will continue to remain strong. Initial jobless claims have continued to since April, an early sign that the labor market is weakening. The Federal Reserve will likely continue its rate-hiking cycle until the labor market shows weakness for consecutive months. In the recent Fed meeting, Jerome Powell declined to offer forward guidance regarding rate hikes. He stated that moving forward the Fed will be data dependent. Moving forward, the Federal Reserve’s actions will be less predictable than before. It is reasonable to assume that the data Powell referred to is likely inflation and unemployment. Rate hikes can be expected if prices continue to increase, as long as the labor market remains intact.
Sources: Globe St, WSJ, First Trust, Federal Reserve.