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Are major U.S. cities headed for a doom loop?
When will the Fed pivot?
Will we see an avalanche of distressed assets in 2024?
04
Do alternative sectors have as much resilience as we think?
Will the U.S. fall into recession in 2024?
08
Will rising consumer debt halt retail’s comeback?
06
Has the wave of multifamily construction reached its peak?
07
With industrial demand slowing and vacancy rising, will rents decline?
09
Is there enough office space to meet the flight-to-quality demand?
10 Critical Questions for
10
When will we see capital markets turn the corner?
No. While facing challenges, cities have proven to be resilient.
17%
After worsening significantly in 2020 and most of 2021, net migration in the six U.S. gateway markets was 17% stronger in 2023 than it was in 2019.
$16.48
The national average Class A CBD asking rate is $16.48 higher than the average Class A suburban rent. A rent premium of 46%—in line with the rate after the Great Recession, which was 47% in mid-2010.
WHAT TO WATCH
DID YOU KNOW?
The pandemic disproportionately impacted urban cores of cities. However, the residential exodus has reversed in most major markets. Net out-migration is now lower in the six U.S. gateway markets than it was in 2018 and 2019. Additionally, after decreasing for five years, international immigration—the key driver of population in large, gateway cities—is back above the 30-year historical average.
While vacancy has increased more in CBDs than suburbs— partially due to supply-side dynamics—CBD vacancy is still lower than suburban vacancy in 40% of U.S. markets. In a hybrid work environment, many occupiers continue to look at centralized, urban office locations as the best option for their workforce. Note: Six U.S. gateway markets are Boston, Chicago, Los Angeles, New York City, San Francisco and Washington, DC.
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The bright side - ATLANTA
The bright side - DC
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Source: Cushman & Wakefield Research
Statements herein represent Cushman & Wakefield predictions only. Actual results could vary based on unforeseen circumstances.
The Fed will pivot in Q2 2024.
150 bps
The number of basis points (bps) we expect the federal funds rate to decrease by the end of 2024. This is from a peak of 5.25%-5.5%.
2.5%
The estimate of the long-run neutral federal funds rate. Although the Fed is expected to start cutting rates next year, it will take years to return to this neutral rate, which means that higher for longer (H4L) is real.
Pay attention to the personal consumption expenditures (PCE) price index, which is a measure of inflation. Even if the labor market softens, PCE inflation must improve or show sustainable downward movement toward the Fed's 2% target. If this doesn't occur, the Fed will not budge, and H4L will extend beyond what we believe.
Job losses do not always mean an immediate Fed pivot. In the 1980s, there were five instances where, when the Fed saw initial reports* that showed job losses, it either maintained or increased the federal funds rate. Since then, there have been three instances where job reports showed losses, and yet the Fed did not cut rates right away. Note: * Payroll reports are revised. We analyzed the initial estimates provided by the U.S. Bureau of Labor Statistics that would have been on-hand in real-time.
MARKET MATTERS: EXPLORING REAL ESTATE INVESTMENT CONDITIONS & TRENDS
Source: Federal Reserve, Cushman & Wakefield Research
No. Although distress levels will continue rise, it will not be an avalanche.
$79.6B
The level of outstanding distress as of Q3 2023. Office accounts for 41% of the total distress, Retail 27%, Hotel 17%, Multifamily 9%, Industrial 2%.
$215.7B
Potential distress forming as of Q3 2023—larger than the cumulative distress observed during the entirety of the Great Recession.
Although middle and low-quality office assets are under significant pressure, and loan maturities will create pressure across all product types, it is worth noting that NOI is up considerably over the life of the average loan expiring over the next three years. In general, those who bought prior to 2019 have accumulated enough embedded value appreciation that their properties' current estimated values are above their debt balance. (Estimated implied LTVs, given both accumulated appreciation and outstanding loan balances for properties purchased between 2010 and 2019, is 51.5%.)
Properties bought since 2019 face estimated current implied LTVs of 58.9% (significant variation by sector). While forecasted value declines will chip away at accumulated equity, not all investors will need to sell or crystalize such peak-to-trough prints. Many will choose to hold through the inflection, given strong embedded appreciation, insulated current LTVs and sturdy cash flows.
Source: MSCI Real Capital Analytics
Alternatives have unique, long-term tailwinds that will require substantial expansion in real estate footprints.
32%
The percentage of investors surveyed in 2023 by AFIRE who expect alternative assets to increase in value over the next 12 months.
28.3%
The percentage of fund asset class targets that were alternatives in 2023—an increase from 17% in 2015.
Keep an eye on how much fund allocations toward alternative sectors grow over the course of the next year, as investors diversify from traditional CRE sectors.
Transaction volume for alternatives has totaled $289 billion over the past three years, a 79% increase over the prior period.
VITAL SIGNS 2023
UNLOCKING ALTERNATIVES
Source: AFIRE Investor Survey, Preqin, MSCI / Real Capital Analytics, NIC MAP, Revista Med, CoStar, Cushman & Wakefield Research
Yes, Q1 2024.
25 MONTHS
The average number of months it has taken for a recession to begin after the Federal Open Market Committee (FOMC) kicks off a rate-hiking cycle. Except for once in the mid-1990s, a recession has followed in this pattern.
11 MONTHS
The average* number of months that the 10-year/3-month Treasury yield curve has inverted before a recession starts. (Daily data indicates that yield curve inversion has happened anywhere from an average of 16 to 24 months in advance.) There is variation, but this leading indicator has a good track record.
Watch for a de-inversion in the yield curve. Historically this has been driven by declines in the federal funds rate, however, a recent steepening at the long end caused the spread to become less negative. On average, the 10-year/3-month Treasury yield curve de-inverts 4.4 months before a recession starts.
When the Fed says "long and variable" lags, they mean it. Historically, the Fed has tightened for about two years before a recession. (Only one tightening cycle—in the mid-1990s—was not followed by a recession. This is the "evasive soft landing" the Fed is hoping to achieve.) Our moderate recession starts in Q1 2024, roughly two years after the Fed lifted off this cycle.
2024 U.S. MACRO OUTLOOK REPORT
Source: Federal Reserve, National Bureau of Economic Research, Cushman & Wakefield Research calculations. Note:*Based on analysis of monthly data.
Not yet. Supply-side pressure will remain through 2024, but ease in 2025-2026.
-62%
The reduction in construction starts over the past year due to high construction costs, expensive financing and opportunities to buy properties below replacement cost.
3 YEARS
The amount of time it will take to absorb (at normalized levels) the pipeline of projects already underway.
While the multifamily market will likely face supply-side pressure in 2024 and in the early part of 2025, the bulk of the supply wave delivered in 2023 and will continue through the first half of 2024. With more than 60% of construction in mid- and high-rise product, supply pressure will remain through 2024. Sun Belt markets have the most robust pipelines but also have been the nation’s leaders in absorption, which means that once the supply wave passes, these markets are primed to outperform.
The last time U.S. multifamily construction starts were this low (about 53,000 in Q3 2023) was in 2012. That should set the market up for recovery on the other side of this construction wave in 2025 and 2026.
U.S. MULTIFAMILY MarketBeat
CONTEXTUALIZING DEVELOPMENT RISK
Source: CoStar
No. While rent growth will slow in 2024, rents will not decline.
4.1%
Where annual asking rental rate growth is anticipated to moderate in 2024, as tenant demand remains tempered amid a cooling economy. For comparison, rate growth peaked in 2022 at 21% and declined in 2023 to approximately 12%.
946 msf
The total amount of industrial space forecasted to deliver from 2023 to 2024 (615.6 msf in 2023 and 330.5 msf in 2024). This will continue to exert upward pressure on vacancy rates. However, rates will remain historically healthy across most markets.
Markets will see vacancy rates climb due to softer demand and a wave of new supply delivering throughout 2024, but vacancy will remain below the long-term historical average before recompressing again. As a result, rent growth will persist but at a more sustainable, modest pace in the coming year.
The last time annual rent growth was sub-10% was in Q4 2021. Also, the U.S. vacancy rate has not reached 5% since Q3 2020.
No. Although pockets of weakness will emerge, the retail sector's fundamental tailwinds are expected to remain healthy for the next several years.
$1.08T
Amount of outstanding consumer credit card debt in Q3 2023. This is up 16.6% from a year earlier—an all-time high.
8%
The percent of credit card balances that were newly delinquent (30+ days) in Q3 2023. This was the highest proportion since 2011.
Households have become increasingly reliant on credit to finance spending in the face of higher consumer prices. Now, some borrowers are having trouble paying down debt, which is leading to a pullback in spending. We’ll be watching whether this dynamic spreads to more households and whether retail companies react by scaling back their real estate footprints.
In 2023, retailers have opened 1,100 more stores than they closed. This marks the first two-year stretch of net store openings since 2013-2014.
Source: New York Fed Consumer Credit Panel/Equifax
RETAIL RESILIENCE: CONSUMERS AT THE HELM
Not long term. There is a limit on the availability of top-tier office space.
-700 bps
Vacancy in top-tier office properties* in gateway markets is 700 bps lower than the rest of the market. Direct vacancy in the best buildings is sub-11%.
52%
Overall gross asking rents at top tier assets are 51.5% higher than the rest of the office space in gateway markets. The national premium for top-tier office space is a very similar 51.4%.
Flight to quality is real—companies want the best, new (or newly renovated) space in buildings with a variety of amenities. This top-tier office space, however, only accounts for 10%-15% of total inventory, and the pipeline of new product is less than half of what it was three years ago. Since 2019, the amount of office buildings undergoing significant investment and renovation has doubled. This poses an opportunity for investors who can renovate and upgrade existing office space over the next few years.
The premium for new urban office space doubled in 2023 and now sits 35 percentage points higher than prior to the pandemic (2018-2019).
WHAT’S OLD IS NOW NEW AGAIN: TURNING OBSOLESCENCE INTO OPPORTUNITY
Source: Cushman & Wakefield Research Note: *Includes highest quality 10-15% of office inventory (excluding those in lease up) in six gateway markets (Boston, Chicago, Los Angeles, Manhattan, San Francisco & Washington, DC.
OBSOLESCENCE EQUALS OPPORTUNITY
Best guess: H2 2024.
$419B
The amount of dry powder targeting real estate globally ($250B targeting the U.S.), more than double what was raised during the Great Recession in 2007.
84%
Percentage of institutional investors surveyed by Preqin who expect to increase or hold their target allocations to CRE over the longer term.
While lending standards remain historically tight and in contractionary territory, we’ve seen early signs of an inflection in multifamily and construction. Meanwhile, the office sector is likely dragging the commercial loan series into tighter territory. A Fed pivot will give lenders more clarity, stabilize financials markets (base interest rates), and provide a healthier foundation for lending.
Yield curve inversion dampens credit growth by constraining bank liquidity. The yield curve is expected to de-invert late 2024, which will help banks (CRE’s largest lending source) restore more accretive interest margins and foster a gradually more active lending environment.
BANK FAILURES AND PANICS: FIVE KEY THOUGHTS FOR COMMERCIAL REAL ESTATE
GLIDE PATH REPORT
Source: Preqin
