Written by: Harrison LaHaie
What’s in the News
Democrats remain in control of the Senate and Republicans appear to be taking back the house. Amazon is looking to lay off thousands of workers, joining the ranks of corporations looking to cut costs. The recent CPI report showed that inflation has begun to slow down, while many believe that the Fed will still hike interest rates by at least 50 basis points. However, some Fed officials have begun to talk about slowing the pace of raising rates. Jobless claims have risen but remain low, indicating that the labor market remains strong.
Economic Outlook for CRE
A survey of Commercial Real Estate Executives by Deloitte found that many were skeptical about short term revenue, with 48% predicting revenue decreasing and only 40% predicting increasing revenue. However, the executives were broadly optimistic about real estate fundamentals. This seems to reflect a general trend in the industry. While borrowing costs rising from the Fed’s rate hiking regimen must harm the CRE business cycle and the economy seems set for a recession, the facts on the ground about CRE are not unfavorable. For example, with multifamily, the U.S. needs more housing. Until supply can meet demand, rents will have to rise in the long-term, even if they stagnate now. With industrial, the economy has been shifting to e-commerce steadily for the past 10 years. While the rate of this shift was accelerated by the pandemic, it will continue moving forward at a slower pace. Ultimately, fundamentals are strong in CRE.
As the economic situation in the U.S. becomes more peculiar the more data comes in. CPI’s recent slowdown appears to be good news, but it is still far above the Fed’s target of 2%. Furthermore, GDP rebounded in the 3rd quarter, showing that the economy was not in a recession yet. Still, many analysts predict a recession in the next 18 months. This is because the consensus is that the Fed will have to get tighter than it is right now to really bring inflation down. Historically, the Fed has not been able to stop hiking rates until the Fed Funds Rate exceeded the headline CPI. We are still a long way off from there. With the labor market remaining intact, there is no real reason for the Fed to stop raising rates. The longer the Fed keeps rates high, the higher the likelihood that something breaks in the economy.
Sources: Globe St, WSJ, First Trust, Federal Reserve.