Now that the Federal Reserve has cut the overnight rate by 25 basis points, with additional cuts expected before the end of the year, commercial real estate investors are closely watching the 10-year Treasury.
It is possible that the yield will rise like it did last year, and rising rates could be exacerbated by additional treasury issuance over the next three months as the U.S. government raises capital to pay its bills, according to John Chang, chief intelligence and analytics officer at Marcus & Millichap. If, however, the 10-year Treasury remains range-bound at 4%, that should bolster CRE investment activity.
Multiple lenders remain active in the market, keeping debt capital liquidity healthy, and so far, lender spreads have not widened. With rates comparatively low, investors have a window to lock in their financing, he said.
A primary driver for the rate cut is the weakening employment market, however. And Chang cautioned that this is a factor CRE investors need to consider.
“I don't think we're at risk of a severe recession,” said Chang. “If we do enter a downturn, it will most likely be similar to the recession of 2001, which was relatively mild. If growth is sustained or we enter a mild economic downturn, then commercial real estate space demand should remain positive.”
An employment market slowdown could bolster office space demand as more companies pursue return-to-office strategies, noted Chang. Office absorption has been positive for the past five quarters across the country.
At the same time, consumption has continued to grow despite tariffs and signs of a weakening labor market, reiterating the strength of consumers, said Chang. Inflation-adjusted core retail sales are up 2.2% from last year, driven by spending on apparel, restaurants and e-commerce. Household debt as a percentage of income is near its lowest level in more than two decades, and savings are close to peak levels set in 2021. These metrics suggest retail space demand could remain robust even if the economy slows, and e-commerce strength could reinforce industrial space demand, according to Chang.
Multifamily demand could temper a bit in the coming quarters, although apartment absorption has been at its strongest in 35 years over the past 12 months. If the 10-year Treasury stays near 4%, single-family mortgage rates could come down, opening up the market for more first-time homebuyers, which could lead to some tenant loss.
But still, the weakening labor market does present a risk to multifamily, said Chang. This is especially true for people in their prime renting ages of 20 to 24 years old, who have seen unemployment rise to 9.2% in the past month. That could weigh on household formation and rental housing demand, resulting in slower apartment absorption.
The good news, said Chang, is that apartment construction is also slowing, which sets the market up for a balance in supply and demand and should keep vacancy risk low.
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