Marcus & Millichap Research Services

How Will The CRE Market React To The February Rate Hike?

Fed Slows Rate Increases

• On February 1st, the Federal Reserve announced a rate increase of just 25 bps, the smallest increase since March last year
• Chairmen Powell declared we are seeing disinflation, supported by several consecutive months of easing CPI, PCE, and PPI inflation measures

How Does This Impact Forward Looking Expectations

• While the Fed was eager to project continued increases in 2022, Chairmen Powell is once again suggesting a slower moving approach
• A 25-bps lift in March remains likely, but Chairmen Powell’s posturing has shifted

How will this Impact CRE Investors

• With rate hikes slowing and recession expectations easing, the probability of a soft landing is gaining momentum
• Lending rates have begun to ease, potentially reducing some of the upward pressure on cap rates

*10-Year Treasury through February 1, 2023
Assumes three 25 bps hikes at subsequent FOMC meetings.
Sources: Marcus & Millichap Research Services, Federal Reserve

Watch the Video Below

 

What Factors Are Driving Uncertainty in CRE Markets?

Prolonged Inflation and Rate Hikes Present Recession Risk

• Inflation and aggressive fed rate hikes have eased, making a 25 bps rate hike likely at the Feb. 1 meeting
• Although recession risk has moderated, roughly 50% of economists still expect a recession during 2023

Despite Tech Layoffs, Labor Market Still Exceptionally Tight

• Attention grabbing headlines surrounding layoffs at Microsoft, Google, and others can foster uncertainty, but the unemployment rate remains at a 50-year low
• Overall, the U.S. economy added nearly 225,000 new jobs in December, and still has over 10.5M job openings

What This Means For CRE Markets

• If the economy can avoid a major recession in 2023, a shift in sentiment could lead to a revival of apartment, retail, and industrial space demand
• Underlying data paints a more positive picture than some of the sensationalist media coverage

*Unemployed through December; Job openings through November
Sources: Marcus & Millichap Research Services, BLS

Watch the Video Below

 

Where Are The Best Opportunities within CRE Markets

Apartment and Medical Office Buoyed By Fundamentals

• While apartment vacancy rose 190 bps last year and rent growth cooled, the structural shortage of housing in the economy should bolster renter demand I the next 5 years
• The aging Baby Boomer population will aid demand for medical office space as this cohort advances into their 70’s and 80’s

Retail and Industrial Assets Maintain Strong Performance

• Both Single and Multi-Tenant retail have performed well exiting the pandemic, with multi-tenant rents up roughly 10% since 2019
• Industrial assets have some construction risk, but with the majority of new inventory coming online in just 10 metros, it should remain a favored asset for investors

Even Within Hard Hit Segment Opportunities Arise

• While national office vacancy has yet to recovery from the effects of remote work, suburban office space have outperformed expectations
• Investors should look past any bumps in the road and consider where things well be at 5 years down the road when making decisions

*Sources: Marcus & Millichap Research Services

Watch the Video Below

 

• Looking forward into 2023, which key indicators should investors watch?
• How could the Fed’s decision in February impact the CRE market?
• Why the Fed’s labor shortage battle influences CRE space demand

Sources: Marcus & Millichap Research Services

Watch the Video Below

 

• Have inflationary pressures started to abate?
• How will the Fed respond in the first few months of 2023?
• Which economic signals should CRE investors keep their eyes on?

Sources: Marcus & Millichap Research Services

Watch the Video Below

 

Fed Slows The Pace Of Rate Hikes

• As expected, the Federal Reserve raised the overnight rate 50 bps to a lower bound of 4.25%, following 4 consecutive 75 bps lifts
• Chairman Powell suggested that the terminal rate may have risen, but set expectations for a slowing pace of increases over the course of 2023

Why Is The Fed Easing Rate Movement

• While inflation of 7.1% is well above the 2% target, this figure has fallen 110 bps since September
• Other key indicators like housing, car prices, and gas prices slipped from recent peaks towards the end of 2022

What This Means For CRE Markets

• Slower, smaller rate increases will reduce uncertainty and give the market time to recalibrate. That will help narrow the buyer/seller expectation gap.
• If the Fed continues down the path of smaller hikes in 2023 and inflation manages to ease, we could see buyer competition for assets heat up quickly.

*10-Year Treasury through December 14, 2022
Assumes one 25-50 bps hike at the FOMC meeting in February 2023
Sources: Marcus & Millichap Research Services, Federal Reserve

Watch the Video Below