Questions for
10 Critical
Will labor markets cool off?
How will debt markets respond in 2023 and beyond?
Will consumer spending patterns return to pre-pandemic norms?
Will the central bank be able to tame inflation without causing a recession?
Are occupiers really fleeing to higher quality office space?
How are portfolio allocations shifting throughout the institutional space?
Can households afford today’s sky-high rents?
Will construction costs stabilize?
Will industrial deliveries cause a supply-demand imbalance?
Will a recession spur more people back to the office?
Within six months of the quit rate bottoming out, job losses stabilize and new job creation begins—which in turn propels demand for all forms of property. In prior cycles, it took 2-2.5 years for the rate to bottom out. Given the rate has been steadily declining since late 2021, it could bottom out at the end of 2023.
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Source: U.S. Bureau of Labor Statistics *Wage growth as measured by the Employment Cost Index, YoY % change
3.7%
Unemployment rate in the U.S. as of November 2022, among the lowest rates on record dating back to the 1940s.
Average rate of wage growth for private industry workers in Q3 2022, the highest since 1984.
5.3%
Keep an eye on the quit rate, which measures the number of employees who quit their job as a percentage of the total. A high rate means more people are leaving their jobs to accept new ones, which puts upward pressure on wages. The quit rate is currently hovering around 3%—a near record high. That needs to continue to decline to take pressure off the Fed.
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There is concern that a wage-price spiral is taking hold which will make the central bank's job of taming inflation even more difficult.
In December 2021, CMBS lending reached $89.5 billion—the highest level in seven years.
Source: Real Capital Analytics
-16%
Q3 2022 lending volume, 16% below the 2017-2019 average; despite running below recent highs, lending is still supportive of a relatively active CRE landscape.
CMBS lending September 2022, 30% below the 2017-2019 average volume.
$9.3B
As interest rates level off and as macroeconomic uncertainty fades, financial market volatility will cool, which will help bring Treasuries, corporate bond yields and broader risk premium (spreads) down from recent highs. With more financial market clarity and less interest rate volatility, liquidity will be able to return to the commercial real estate debt markets.
How will the debt markets respond in 2023 and beyond?
Retail properties represent 20% of leased medical space in the U.S. as urgent care, dentistry and veterinary offerings have expanded rapidly into shopping centers in recent years.
Source: Bureau of Economic Analysis, Transportation Security Administration
7.5%
YoY increase in real consumer spending on recreation services in Q3 2022 (outpaced overall spending growth of 2.2%).
Number of passengers screened through TSA checkpoints in November 2022. This is down from 68.3 million in November 2019.
64.4M
Experiential retail.
Overall consumer spending is likely to slow in 2023 given the economic headwinds, but pent-up demand for consumer services remains. Retail centers are increasingly seeking out tenants that provide unique fitness, beauty, medical, dining and entertainment concepts to draw more foot traffic and increase dwell times.
Historically when the Fed first begins to lower rates, property values begin rising 3-4 quarters later.
*Core inflation is the change in prices of goods and services excluding food and energy sectors.
7.1%
Down from its June peak of 9.0%, but still among the highest rates of consumer price inflation in the U.S. since 1980.
How much more U.S. consumers pay each month for the same basket of goods and services than in 2021.
$396
The central bank will continue to raise the policy rate until there is sustained evidence that core inflation* is coming down. Risk remains that the Fed will raise rates too aggressively and push the economy into recession. As of this writing, future markets expect the Fed to pause in mid-2023 in the 4.75% to 5.0% range and begin lowering rates end of 2023 or early 2024.
Source: U.S. Bureau of Labor Statistics, Moody’s Analytics *CPI Urban Consumer – All items
While absorption for the overall market has been negative since the beginning of 2020, there has been approximately 100 msf of positive absorption in high-quality, well-located office assets that have been built or renovated in the past eight years. This type of highly coveted space, however, accounts for less than a fifth of current inventory.
2x
The premium for new construction office space has nearly doubled during the pandemic from 21.2% to 39.0%.
Occupiers are increasingly focused on quality and providing spaces that make employees want to be in the office on a regular basis. In some cases, companies will lease less space and invest the savings in buildings with greater amenities at higher rents. Rent premiums on new office construction will remain elevated above pre-pandemic levels as occupiers continue to prioritize strategic spaces in well positioned properties. Well-capitalized landlords can create value by investing in amenities, services and experiences in and around their buildings.
Source: Cushman & Wakefield Research
(Class A direct deals with a term of 7 years or more)
Single-asset trades of niche sectors now collectively represent 18% of total CRE volume—up from the 10% average share between 2017–2019.
+21%
Increase in niche property transaction volumes from 2021 ($73 billion YTD).
Rise in NCREIF’s “other sector” fund allocations between 2020 and Q3 2022.
+48%
Ongoing institutionalization among niche sectors and continued activity throughout the alternative sectors, will signal maturation of these sectors which will fuel CRE activity and bring investors and owners more diversification opportunities.
Source: Real Capital Analytics, NCREIF
As of now, there are no signs of underlying distress showing up in rental delinquency rates. Delinquencies are down 30 bps over last year in Cushman & Wakefield’s managed portfolio.
$471
The difference between the average principal and interest component of mortgage payment and rent (widest gap in history). Typically, rents are about $65 higher than mortgage payments. Relatively, renting has never been cheaper.
Current average rent-to-income ratios for U.S. multifamily REITs imply renters aren’t having trouble making rental payments. 30% qualifies renters as “cost burdened” by HUD.
22%
Home prices have already started to decline, but for the market to return to the historical spread between rents and mortgage payments, home prices would need to fall by more than 25%. That decline would be more than home prices fell during the Great Financial Crisis (19.8%), insulating apartment demand from further erosion from the single-family market.
Source: FRED, Census, HUD
As of November 23, there were only 59 container ships waiting for a berth in North American ports. This was down from peak levels of 150 ships in February 2021 which contributed to delays in material lead times in the U.S. This has not yet had a direct impact to the construction supply chain due to trucking, rail and energy cost issues.
4.1%
The 10-year annual growth in average building costs. As of Q3 2022, the index was up 11.4% YoY, down from 15.4% Q2 2022.
The average lead time for electrical equipment—one of the most in demand and constrained construction systems. This is up from an average of 14-16 weeks and is forecast to remain above that average as delays persist.
A leveling out of commodities pricing would remove some of the volatility and uncertainty that has impacted the construction sector since the onset of the pandemic. A short economic recession could result in further decreases in commodity prices as construction activity would potentially cool. However, commodity prices will remain elevated relative to pre-pandemic levels due to construction backlogs.
Source: Engineering News Record (ENR) (McGraw-Hill); Moody's Analytics, Raiven
40
Weeks
If all the speculative space currently under construction delivered completely empty, industrial vacancy would only rise to 6.8%—still lower than its historical average.
717
Space currently under construction—potentially delivering into a recession.
The amount of industrial space absorbed over the last two years—nearly double any other 2-year period on record.
Fueled largely by e-commerce penetration and unleashed pent-up demand for goods, the industrial sector has been supercharged since the pandemic started. In 2023, the goods boom will wind down and a record amount of new supply will be delivered.
919
For the first time in years industrial vacancy will drift higher, bringing better balance to the market.
MSF
Cell phone data analyzed by Cushman & Wakefield shows that employee attendance in vibrant neighborhoods—those with myriad restaurants, cafes, experiential retail, etc.—has recovered three times as much as non-vibrant neighborhoods in the same cities.
9.1M
In-person office attendance trended higher throughout 2022 as the pandemic faded. As recession fears climbed in recent months, the trend has become stronger. The long-term trend in office usage is going to be driven by the ability of building owners and occupiers to create spaces and places where employees want to be, are productive, and have options to connect, innovate and get all types of tasks done efficiently.
Source: Cushman & Wakefield Research, U.S. Bureau of Labor Statistics, Kastle Systems
The increase in the number of U.S. workers in the office on any given day since January of 2022.
