Archives for February 2023

What New Construction trends mean for investors?

Some Construction Costs Ease, While Others Climb

• The price of steel, lumber and shipping costs have retreated from historic highs
• At the same time, financing new development has become dramatically more difficult and expensive

New Development Likely To Ease After Current Supply Wave

• Projects that with financing in-place are still working through the pipeline, but the number of new projects are limited
• Record completions for multifamily and industrial are in the pipeline, but pressure from new builds should begin to ease as financing limits new starts

How Will Waning Supply Risk Impact Investors?

• Less competition from new construction will aid the owners of existing space across property types
• While there are no broad-based CRE shortages today, the reduced number of projects could fall well short of demand when the economy strengthens

*Through January
Sources: Marcus & Millichap Research Services, BLS

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Why GDP Forecasts Shifted and Implications for CRE

Major Firms Raise GDP Forecasts for 2023

• The Blue Chip Economic Indicators report released in February shows lifted growth expectations in 2023
• Only two economists in the report are forecasting negative growth this year, down from 7 last month

Does The Shifting Outlook Point To A Soft Landing?

• While sentiment is rising, it is still possible for the economy to reach a recession and achieve modest growth during 2023
• Positive economic indicators like rising retail sales and labor expansion suggest the economy is healthy, but could also sustain more persistent inflation

How will this Impact CRE Investors

• Right now, we are expecting a 25-bps lifts to the Fed Funds Rate each of the next two meetings, but if Fed officials think the economy is running too hot, they could utilize another 50-bps lift
• Smaller lifts give CRE markets more time to react to conditions, while a larger lift could create a disconnect between buyer and seller while the market recalibrates

*Through February 2023
Sources: Marcus & Millichap Research Services, BLS

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What Does January’s Surprising Jobs Report Mean For CRE?

January Employment Data Blows Past Expectation

• The first jobs report of 2023 recorded 517,000 additional jobs in the economy, roughly double the predictions
• This is just the second time in more than 20 years hiring has exceeded 500,000 new positions, other than the pandemic recovery

What This Means For The Federal Reserve

• The media ran two directions with the report, first, that the labor market gains suggests economic strength, and second that too much labor market growth will induce stronger Fed action in the months to come
• Chairman Powell appeared to take a more dovish tone during the last press conference, but the jobs report could shift the Fed’s approach during the next meetings

How will this Impact CRE Investors

• Despite fears of more intense rate hikes, strong employment growth has powered CRE space demand historically, especially within the core property types
• In the long-run, employment growth is a positive for CRE investors, even if financial markets need time to calibrate in the near-term

*Through January 2023
Sources: Marcus & Millichap Research Services, BLS

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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

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