Published on Tuesday, November 22, 2022
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A number of economic indicators are promising, but with more rate hikes on the horizon, how will CRE investors react?
While many economists agree the Federal Reserve "could still pull off" a soft landing as inflation appears to be cooling at least somewhat, "there are certainly no guarantees," according to one industry watcher.
"Wall Street rejoiced on November 10 when the October CPI reading declined and headline inflation retreated to 7.8%," says John Chang of Marcus & Millichap. And "digging under the surface, there are some promising trends" -- including the lower price of lumber and steel, which quadrupled in price during COVID-19, and the declining cost in shipping a container from China to Los Angeles, which now stands at around $2,700, down 86% from its peak. The producer price index, which measures wholesale prices, is also showing a decline.
These indicators are promising -- but will they be enough to induce the Fed to back off on further rate increases? Chang notes that Fed Chairman Powell has suggested the central bank will likely make smaller rate increases going forward, signaling an ease on the pressure, but the overnight rate will still likely increase by 50 basis points in December and by 25 to 50 basis points in February.
"After that, the Fed may coast for awhile o see how things go," Chang says, adding that the consensus is that the overnight rate will peak in the 5% range, give or take 25 basis points, at some point next year.
For real estate investors, "that suggests a bit of a bumpy ride in 2023," Chang says. "Even if a recession is averted and inflation begins to abate, there will still be ripples that affect space demand for all types of CRE. The good news is the rate movements should become less volatile and a little more predictable as the Fed eases back from its aggressive stance. That means buyer underwriting and assumptions could become more stabler educing some of the interest rate driven retrades that have been taking place. that would in turn narrow the buyer seller expectation gap and alleviate some of the uncertainty in the real estate transaction market."