United States economic outlook

Activity

The US economy is slowing, raising fears that it might be heading towards a hard landing. We expect a further deceleration in economic growth to below 2% annualised in the second half of 2024, as consumer spending slows and business investment remains muted. However, we still expect a soft landing, helped by strong consumer and corporate balance sheets, slowing price pressures, and an ongoing easing in financial conditions.

Inflation

Underlying inflation pressure is cooling, even if the process has been bumpy this year. We expect further progress, given declining prices for core goods and labour costs, and a long-awaited easing in shelter inflation. This should keep sequential core inflation around the Federal Reserve’s (Fed) target. But annual inflation rates will not fall closer to 2% until early-2025, given unhelpful base effects. The outlook for price growth is clouded by an uncertain policy backdrop, with former President Donald Trump running on an inflationary policy platform.

Policy

The Fed kickstarted its easing cycle with a bang in September, cutting rates by 50bps and signalling a further 50bps of easing by the end of this year. This increased urgency reflects a desire to proactively support the economy, as upside inflation risks recede and concerns over the labour market build. While we are pencilling in 25bp cuts at the November and December Federal Open Market Committee meetings, the bar to 50bp cuts looks low. Rates should fall below 3% by the end of this easing cycle, helping to adjust policy to more neutral settings.

Source: abrdn, September 2024
Forecasts are a guide only and actual outcomes could be significantly different.

 

North American real estate market overview 

While interest rate cuts are welcome, starting out with a large cut doesn’t mean a large fall in yields is guaranteed. The reset in valuations over the past three years has been quite mild, compared with the magnitude of the interest-rate shock. Spreads to 10-year yields remain well below historical norms.  

In the past three years, 10-year yields have climbed 230bps. Industrial yields increased by only 116bps, multifamily yields expanded by 125bps, and even offices – which charted the biggest hit to yields – only expanded by 170bps.

This means that to bring the spread back up to historical norms, yield compression should be modest in the future. Accordingly, we think there is a long-term floor to yields. Future pricing will likely be dictated by net-operating income growth. 

That said, we are probably at the end of the tunnel in terms of capital value decline. We forecast capital growth of 1.4% for the three-year annualised period, driven largely by industrial and apartment performance. But there is growing bifurcation across the North American markets that we cover.

North American real estate market trends

Offices 

Year-on-year job growth in the office sector has seemingly stalled, holding under 1% since mid-2023. Most projections show growth remaining at or falling below this level, which could draw out a recovery in occupancy.

Meanwhile, well-capitalised owners are still willing to trade higher concessions and more generous fit-outs to secure long-term leases. The payback period for tenant improvement costs has also stretched from three years to over four years, which puts landlords at risk of a negative return if they cannot secure a renewal or new tenant.

At the market level, the performance bifurcation will be apparent with the supply constrained East Coast outperforming the technology-led West Coast. But at an asset level within these markets, we expect the preference for well-amenitised, new-build offices to drive performance.

Industrial and logistics 

Vacancy rates are expected to struggle until the third quarter of 2025, given the new supply for industrials. But we’ve seen the first signs of improvement in industrial net absorption from the second quarter of 2024. Amazon, the largest industrial tenant, has also been expanding its network.

The strike planned by the International Longshoremen’s Association (ILA) is the focus of the industrial market as we enter the holiday and election season. But it should have little impact on the long-term drivers of onshoring and nearshoring, especially in the upper Midwest, the East Coast and the Gulf Coast. While supply threatens to tighten further in California because of the approval of assembly bill 98, it shouldn’t materially change the outlook for the current forecast period.

All this could mean that the industrial vacancy rate could peak at a relatively low rate in 2025, which could support a re-acceleration in rental growth once availability begins to tighten again in early-2026. At the same time, we expect more favourable financing rates to encourage new supply. This would then lead to a quick normalisation of rental growth in the later years of our forecast.

Retail

Retail availability is tight, hovering around historic lows since the end of 2022. It’s now more than 200bps below the historical average of 6.8%. The low availability of strip and standalone retail and higher rates discouraging new supply are causing retailers to agree on higher rents to secure space. This should lead to strong near-term returns.

Strip and power centre availability is expected to remain tight, especially in the South and Southwest as tenants try to capture the growing buying power brought about by population gains in those markets, Meanwhile, mall availabilities should keep rising for the foreseeable future. Traditionally, mall-based retailers look towards neighbourhoods and power centres to reposition their footprint in areas with stable foot traffic.

While it does look positive in the short term, a weakening consumer backdrop and shallower tenant demand in the later years of the forecast may eventually challenge rental growth.

Multifamily

Multifamily pricing has remained stable throughout late-spring and summer. In part, this reflects the strong rebound in multifamily absorption we’ve seen throughout the second and third quarters of 2024. The total number of absorbed units is 450,000 year to date, the strongest number since 2021.

However, there is still excess supply that will need to be absorbed. For the rest of the year, the Sunbelt will struggle to absorb the bulk of supply. Demand for the East-Coast hubs is expected to remain strong. With high barriers to homeownership and limited supply numbers, vacancy rates for the East-Coast markets should stay relatively tight.

Across the regions, this means a relatively modest outlook until mid-2025. But there is the possibility of a delayed supply response, given the current higher-for-longer environment. The average construction lead time for multifamily could mean that rental growth accelerates as we head into 2026.

Outlook for risk and performance 

The outlook for US offices hasn’t changed much. Low job growth in the office sector is challenging fundamentals. Effective rental growth will be weak as sublease availabilities force landlords to offer elevated concessions to attract and retain tenants. There’s also the impending lease turnover risk, which may lead to even higher vacancy rates.

Established population hubs on the East Coast are our preference for multifamily. We think the outperformance in Washington DC should begin to moderate. The Sunbelt will be relatively weak, given excess supply. The vacancy rate for multifamily should stabilise in 2025, but a delayed supply response should re-accelerate rental growth and capital values in 2026.

We like strip retail, lifestyle centres and standalone retail. We particularly like grocery or discount-store-anchored properties in the Sunbelt and select states in the Northeast, such as New Jersey and Massachusetts. These should benefit from higher population growth, greater buying power, and a limited supply pipeline. But rental growth for these properties is likely to moderate as retail sales stabilise and the pool of tenants seeking space becomes shallower.

We are still positive about industrial and logistics markets surrounding the Gulf and East-Coast ports. We think these ports should be primed to capture more shipping volumes, as friendshoring becomes more prominent, despite some short-term disruptions. Land-border traffic is expected to grow because of nearshoring; it’s expected to boost markets with established intermodal terminals, such as Chicago and Dallas.