Analyst: CRE Story Line Moves Beyond Inflation, Rate Hikes, Imminent Recession

Drivers suggesting future commercial real estate space demand will strengthen are plentiful.

Among them is that the total number of jobs in the US is at a record high. New jobs have been added every month for 38 months straight, and there are 5.5 million more jobs today than there were at the pre-pandemic peak.

Unemployment is at a still low 3.9%, and the strong employment market is pushing real discretionary income 6.5% higher than it was before the pandemic.

That’s building personal financial momentum with inflation-adjusted total cash savings, including money market funds, trending upward over the last 10 months.

Together, this is supporting retail sales, which are 16.8% greater than before the health crisis, on an inflation-adjusted basis.

Speaking on a recent Marcus & Millichap analysis video, John Chang, Senior Vice President and National Director of Research and Advisory Services, Marcus & Millichap, said these macroeconomic metrics reiterate the strength of the US economy, reinforcing the prospect of a soft landing.

Related to commercial real estate, the industry has moved on from headlines that was focused on inflation, Fed rate hikes, and an imminent recession.

For example, in 2022, demand for apartments fell, consumer sentiment “dropped like a rock” and new household formation declined, Chang said.

However, for the last four quarters apartment absorption has been positive.

In 2023, apartment absorption totaled more than 236,000 units, and Marcus & Millichap is forecasting that to go up to about 390,000 units in 2024.

In multi-tenant retail, the momentum is even stronger. This sector has had positive absorption for 13 quarters straight, and the vacancy rate is at its lowest level in more than 15 years.

As for industrial, absorption has been positive for 55 quarters and counting.

Nonetheless, “There’s definitely a fair amount of uncertainty, uncertainty about inflation, uncertainty about interest rates, and uncertainty about economic risk,” according to Chang.

“But if you consider how strong the economic momentum is and how that will shape commercial real estate demand, over the next few years, the outlook is more optimistic.”

Chang said assuming the Federal Reserve doesn’t hold rates too high for too long and induce a recession, commercial real estate space demand should continue to strengthen.

“And if your anticipated real estate hold period is five years or more, the outlook is pretty promising,” Chang said. “So, investors who are focused on the short-term headwinds will likely remain in a holding pattern and investors, who are looking further ahead are already in the process of re-engaging the market.”