Analyzing Economic Indicators: Implications for Commercial Real Estate – Insights from NAR’s Forecast Summit 

The National Association of Realtors Chief Economist Lawrence Yun just released insights from the NAR Real Estate Forecast Summit. 

The report looks at the key economic factors driving the commercial real estate market—interest rates, consumer spending, asset valuation, and fiscal policies—and their implications for the space. 

High Interest Rates 

As you have probably noticed by following the financial press, there is a noticeable impact of high interest rates on borrowing and refinancing activities. With the Federal Reserve’s adjustments in response to economic shifts, we’ve seen fluctuations in the prime rate, 10-year Treasury yield, and Fed funds rate.  

These changes have subsequently hindered the ability of consumers and investors to borrow affordably. The increasing cost of credit, particularly noticeable in consumer-focused loans like credit cards, personal loans, and car loans, may be tempering consumer spending to some extent, despite high asset valuations in the stock market and home prices offering a buffer of consumer confidence. 

However, total asset valuation significantly exceeding total liabilities suggests a supported consumer spending trend. The disparity between positive consumer spending and negative net absorption in both retail and warehouse spaces suggests things are changing in commercial real estate spaces, with online shopping habits and physical store visits both remaining strong. 

Rate Cut Effects 

One of the more pressing issues facing the market is the Federal Reserve’s indication of potential interest rate cuts, which, while promising for borrowers, may not be entirely beneficial due to the United States’ growing budget deficit and the consequent pressure on interest rates. This fiscal challenge, marked by government outlays surpassing tax revenues, alongside soaring interest costs akin to national defense spending, creates an environment where any fiscal policy adjustments carry significant weight on market dynamics. 

The real estate transaction landscape has witnessed a drastic cut in commercial transaction volumes, a 60% reduction over two years, with commercial property prices also facing downward pressure. This adjustment period sees cap rates rising, though still considered too low, indicating a possible further reduction in property prices, especially if rent growth cannot support the existing rate levels. 

The adverse impact extends to community banks, which have traditionally been significant contributors to commercial real estate loans. High interest rates have made borrowing less attractive, potentially contributing to a tighter credit environment for commercial real estate projects. 

A Stable Market in 2025? 

Future projections suggest a stabilization and moderate recovery of commercial property prices, excluding office spaces, in light of anticipated Federal Reserve rate cuts in 2024 and 2025. This adjustment, hoped to bring the 10-year Treasury yield down to around 3.5%, is expected to make financing more accessible, thereby supporting investment in real estate. 

The shift in work habits post-pandemic, with a significant portion of the workforce continuing to operate remotely, has had a pronounced effect on office space demand, contributing to climbing vacancy rates and delinquency on office loans. However, the hotel sector is showing signs of recovery, as indicated by improving occupancy rates, suggesting a gradual return of travel and tourism. 

Long-term leasing demand, excluding office spaces, is closely tied to job market health. The creation of 5 million more jobs compared to pre-COVID highs underlines this dependency, emphasizing the critical role employment levels play in driving demand for commercial and residential spaces alike. 

Positive Net Leasing and Investment Sales 

Looking ahead, Yun predicts that the Federal Reserve’s anticipated interest rate cuts, combined with moderated Gross Domestic Product (GDP) growth, will add positively to net leasing and investment sales. There is special optimism for land and single-family development as the market seeks to correct a decade of underproduction in response to housing shortages. 

While the real estate market faces challenges from high interest rates, budget deficits, and the evolving needs of consumers and businesses, there is cautious optimism for stabilization and recovery on the horizon. You can read the full report for yourself on the NAR Site, here. 

March 25, 2024