Interest-rate sectors are feeling the pinch of tighter monetary
policy
Cushman & Wakefield (NYSE: CWK) today released its 2024 U.S.
Macro Outlook report which describes the economic landscape as a
rolling recession, one in which some industries contract while
others continue to expand. Sectors that are currently experiencing
some version of a recession include manufacturing, transportation
and warehousing, finance, and real estate. But the report
emphasizes that within the commercial property sector there are
both strengths and weaknesses.
“The backdrop for CRE in our baseline forecast is one with many
shades of grey. Some sectors that are decelerating will probably
surprise onlookers with their resilience—such as what we envision
for industrial and multifamily demand. As for retail, limited
supply puts a cap on just how high retail vacancy will go,” said
Rebecca Rockey, Deputy Chief Economist and principal author of the
report. “Although office is complicated, we believe we are well
into the hybrid transition, and thus demand destruction will start
to taper off. Nuance here matters and underscores the importance of
fully understanding the sector to maximize opportunities for both
occupiers and investors.”
Key Findings
Office:
U.S. office vacancy peaks in early 2025 at 21.5%, up another 210
basis points (bps) from today’s 19.4%.
Effective rents will decline another 5.4% in 2024, bringing the
total expected peak-to-trough decline to 23%.
After peaking in Q1 2020 at 135.2 million square feet (msf), the
office construction pipeline has receded by more than 50%, sitting
now at 63.5 msf with little promise of a pickup anytime soon.
Cushman’s economists note that the weakness in the construction
sector is likely to benefit the highest quality segments of the
property markets and, in general, help existing buildings
repopulate a bit quicker.
By 2025, Cushman & Wakefield’s modeling indicates that most
firms will have completed their downsizing as it relates to hybrid
and remote work, allowing for the relationship between job growth
and demand for office space to reestablish itself, and the office
sector will begin to register positive absorption once again. From
2025 through 2033, the outlook calls for 222 msf of net absorption
to be realized.
Industrial:
Industrial net absorption downshifted in 2023 coming off
frenetic back-to-back years in 2021 and 2022,
Since the industrial boom that brought vacancy down to 2.8% in
Q2 2022, vacancies have been drifting higher, rising to 4.7% as of
Q3 2023. Vacancy will peak in early 2025 at 6.2%, roughly 200 bps
lower than the historical average.
A decent share of the existing construction pipeline is
accounted for, and development will taper off quickly as
construction starts (measured in square feet) are down by 60% thus
far in 2023. We forecast demand to return to its pre-pandemic pace
(around 275 to 300 msf per year) by 2026 while completions start to
ramp back up. The current supply-demand imbalance will reverse, and
vacancy will return to sub-5%.
Retail:
The resilience of U.S. consumers has been a key ingredient
supporting economic growth and the CRE retail sector this year.
The number of announced retail store openings year-to-date is
outpacing closures by a margin of 1,000, thanks primarily to the
nearly 1,800 net openings in the discount sector alone.
Construction has been subdued during the recent period of
healthy demand, leading to historically tight vacancy rates and
rental increases. Our baseline forecast projects that net
absorption will decline by only 11.4 msf between 2024-2025, less
than half of the pullback experienced in 2020.
Multifamily:
Despite an unprecedented supply wave, the apartment market is
enjoying a solid year characterized by healthy rental demand and
positive rent growth.
Macroeconomic and demographic factors have contributed to
resurgent demand this year. Amid sharply higher mortgage rates and
buoyant single-family home prices, the economics of renting versus
owning have never been more favorable.
The national vacancy rate will increase from its current level
of 7.8% to reach 9.0% at the end of 2024 as leasing momentum slows,
before retreating to historical norms.
New supply is expected to crest in early 2024 and we are
forecasting 400,000 new units to come online next year in total.
But after that, supply is set to slow abruptly, settling into an
average of 183,000 units delivered per year from 2025-2027, nearly
25% below the 2015-2019 average.
Capital Markets:
Uncertainty surrounding Fed policy on interest rates remains a
central theme, as markets have witnessed the 10-year Treasury
fluctuate from 3.5% at the start of the year to as high as 5.0% in
October.
Transaction volumes have fallen sharply since the record-setting
second quarter of 2022, and year-to-date CRE sales this year are
off 56% from a year ago.
The pricing adjustment is expected to accelerate in 2024 as
needs-based sellers will be incentivized to market properties at
prices consistent with higher interest rates. In our baseline
forecast, cap rates are forecast to expand significantly as a
result.
Property values are expected to turn the corner in 2025 as
diminished uncertainty, lower interest rates and inflecting net
operating incomes spur increased buyer and lender conviction, which
will help to launch more fluid transaction activity. Dry powder
targeting CRE investments continues to accumulate, particularly
across opportunistic and value-add strategies.
To see the full Outlook, with sector-specific data for office,
industrial, retail, multifamily, capital markets and niche assets,
please click here.
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global
commercial real estate services firm for property owners and
occupiers with approximately 52,000 employees in approximately 400
offices and 60 countries. In 2022, the firm reported revenue of
$10.1 billion across its core services of property, facilities and
project management, leasing, capital markets, and valuation and
other services. It also receives numerous industry and business
accolades for its award-winning culture and commitment to
Diversity, Equity and Inclusion (DEI), Environmental, Social and
Governance (ESG) and more. For additional information, visit
www.cushmanwakefield.com.
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version on businesswire.com: https://www.businesswire.com/news/home/20231211222530/en/
Michael Boonshoft Michael.boonshoft@cushwake.com
212-841-7505
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