The United States’ economic outlook for 2024 looks favorable, according to Mark Zandi, chief economist, Moody’s Analytics, and other panelists featured in last week’s Cutting Through Uncertainty: 2024 Economic & CRE Outlook webinar, hosted by Marcus & Millichap.
Commercial real estate’s auspices for the year, meanwhile, are varied by sector, as is often the case, with open-air retail and hotel sectors both offering strong fundamentals, while opportunities in office and self-storage will likely be more difficult to find (but potentially more lucrative).
The economy
Job growth will slow in 2024 but will remain solid across most industries, with unemployment continuing to hover below 4 percent and inflation continuing to drop toward 2 percent, said Zandi.
If the economy were to be adding 100,000 jobs a month a year from now, that would sound right to Zandi, he said.
The flow of immigrants into the US in recent years (2 million 2022 and 3 million in 2023) is a trend that supports increased labor-force growth and could support job growth in coming years.
Meanwhile, consumers are spending just right, said Zandi. They are not spending with abandon but in a way that supports economic growth and businesses.
“As long as the consumer does their thing, hangs tough, continues to spend, I think the economy should be just fine,” he added.
Of course, that isn’t to say a smooth economic year is a shoo-in for the United States. Marcus and Millichap and Moody’s Analytics provided a slide in the webinar that showed various situations and the severity of risk on one axis and the likelihood of occurring on the other axis.
Among possible risks in 2024 is a spike in oil prices, which could come from continued Middle East tensions and conflict and from a possible resurgence in demand from China.
The banking system, which responded aptly in March 2023 when problems emerged with banks such as Silicon Valley Bank, is “still under a lot of pressure,” said Zandi. The yield curve remains inverted and CRE portfolios are posing to be an issue for some mid- to small-sized banks.
Zandi also said, “Loan growth has slowed because of the tightening in underwriting, and regulatory costs are on the rise as regulators are asking banks to raise more capital and liquidity, and risk-management costs are rising.”
The U.S. fiscal predicament could also hurt its economic growth potential. Zandi discussed the publicly traded debt-to-GDP ratio, observing, “We need to make some significant changes here in our fiscal trajectory,” though he noted that such changes will likely come in 2025, after this year’s election, when the then-president will be faced with some difficult fiscal decisions.
Commercial real estate
“Retail fundamentals are very strong,” said Jessica Zaski, executive vice president, chief transactions officer, ShopCore.
While retail transactions were down roughly 50 percent year-over-year in 2023, that reduction was much better off than multi-family and logistics, said Zaski. “We are hearing more and more groups who haven’t historically, or in more recent history, been in retail and are wanting to come back in – on the institutional side, the sovereigns, etc.,” observed Zaski. “So it’s actually been overall a very positive story.”
Zaski said that many of ShopCore’s retailers have mastered the omnichannel means of meeting customers in the way they want to be met, whether that means via a traditional in-store shopping experience, ordering online and picking up from the store, or having the store operate as its own distribution point. Accommodating the customer’s shopping desires has been critical in successful retail operations.
Meanwhile, office generally continues to face a difficult environment, as demand for old stock and therefore its value is down notably. Sean Bannon, managing director, head of U.S. real estate, Zurich Alternative Asset Management, said that his firm therefore is focusing on trying to have a diverse office portfolio, honing in on boutique offices and interesting submarkets with good amenities.
“I think the issue with office is really just getting to almost a repriced set of expectations and fundamentals around what we think a steady state will look like a couple years forward, to begin to trade,” said Bannon. “Because there is a very, very significant issue with near-term debt refinancing, [with] the funding gap there.”
The self-storage sector, on the other hand, experienced a counter-cyclical trend during the pandemic, as its vacancy rates dropped. Since then, real changes have occurred in the industry, said John Chang, senior vice president, research services, Marcus & Millichap. Vacancies have drifted upward and there has been significant consolidation in management, operations and ownership of self-storage, with various big mergers and acquisitions taking place in the ownership space, such as Public Storage’s acquisition of Simply Self Storage for $2.2 billion.
The wave of further self-storage construction that is on the horizon could create some further challenges for the sector, said Chang.
While the hotel industry “took it right on the chin during the pandemic,” according to Chang, the fundamentals are now strong for the sector, with occupancy rates at levels close to their pre-pandemic rates and RevPAR at a record high.
Housing prices remain extremely high due to a lack of supply and high mortgage rates. Zandi said he expects some kind of forthcoming correction in housing prices, though this likely could be prices going flat.
Zandi added that new homes, particularly in the affordable and middle part of the market, need to be built to meet demand. He voiced a hope that a wave of such construction could come after we get to the other side of high interest rates.
“Hopefully, lawmakers can make a few policy changes to help with supply,” said Zandi, mentioning a low-income housing tax credit that is popular in Congress and is currently included in tax legislation making its way through the legislative branch.
Zandi said the tax credit “would be, I think, one of the best ways to incentivize more affordable rental building very quickly, and that would be very helpful. So, hopefully, the lawmakers can get it together and pass that piece of legislation.”
Overall, Bannon concluded his remarks in the webinar by saying that he thinks 2024 and 2025 deals will be a great vintage, adding, “Some real interesting opportunities, driven by the problems of existing owners, [could help] joint venture rise to some really, really good and lucrative long-term real estate investments, so we’re pretty constructive on the next 12-months and the opportunities we’re going to see.”