Predicting the future for commercial real estate
Bottom line: “Any way you cut it, property markets are going to soften with the broader economy, rents are going to slow down, property income growth is going to slow down.”
The Fed’s presence will continue to be felt
The Fed will continue to loom large in 2024, Acton suggested. While nearly two years of rate hikes since March 2022 have had the desired effect of bringing inflation down from the four-decades highs reached last year, it’s still a little bit over a percentage point higher than the Fed’s desired 2%. The consumer price index (CPI), monitored by the US Department of Labor, is hovering at around 3.4% from 9.1% recorded in June 2022.
“We’re also at this inflection point where the Fed says they’re sort of done raising interest rates and they’ll probably be cutting interest rates,” Acton said. “So, you have to figure out that balance slowing property income, property earnings, and lower interest rates. In other words, lower discount rates and higher multiples – things like that.”
In predicting the future, he suggested, it’s sometimes fruitful to revisit the past. In the present context, think back to the 2007-08 financial crisis.
Looking to the past in presaging the future
“If I had to guess, I’d say that property adjustments – the values in those adjustments – that probably plays itself out by about the middle of the year,” Acton said. “If you look back at the financial crisis period, it took eight quarters for private market real estate to fully adjust. I thought it was probably going to happen faster this time, but we’re five quarters in – and probably fourth quarter data will be negative again – so that’ll be six quarters.”