United States economic outlook

Activity 

The economy entered 2024 on a seemingly solid footing, with the latest payroll data pointing to steady, if unspectacular, job gains. Consumer spending is ticking along nicely, and households are feeling a little less downbeat as inflation cools. We continue to think harder times lie ahead, though. Dwindling household savings, shrinking corporate margins, and tight credit conditions will weigh on growth over the first half of 2024, before a mild recession in the second half of 2024. But the path to a soft landing continues to widen, helped by a large and ongoing easing in financial conditions. 

Inflation 

Consumer price index inflation is running at uncomfortably high rates, particularly in the services sector. Indeed, over the past six months, core services inflation has risen 5% in annualised terms. However, these pressures look less acute in the Federal Reserve’s (Fed) preferred personal consumption expenditures inflation measures, and this pattern looks set to continue for December. We still think some aspects of inflation remain sticky and these might slow progress towards the Fed’s target in early-2024. However, the broad picture is that we have seen very significant progress in tackling the inflation surge in the US.

Policy 

The Fed delivered a dovish policy pivot in December, removing its bias towards further tightening and starting the conversation around rate cuts. As inflation slows, the Fed is increasingly focusing on avoiding a hard landing, so we now expect the first cut in May rather than in June. Markets are pricing-in an even earlier start. We can’t rule out a cut in March, but we think that this would require a more marked deterioration in growth and inflation. Thereafter, the market expects around 150-175 basis points of easing over 2024, but we are pencilling-in even brisker easing as the economy struggles. 

North American real estate market overview 

We expect 2024 to be an interesting year. In the first half, we expect prices to fall 7-10% across sectors.

More price discovery is expected to occur, at least in the first half of the year, as elevated interest rates and a mild recession could lead to attractive prices for selected assets.

Secondary office assets have already seen sharp repricing because of rising vacancies. This is a result of hybrid working. We think that once interest rates begin to drop and inflation cools further, conversion or rehabilitation of underperforming offices will become more attractive and financially viable. We also expect to see more substantial state/local-government aid for these initiatives in 2024.

In the retail sector, weak supply for strip retail is proving positive, but consumers are expected to face headwinds this year. This leads us to be cautious on the near-term prospects.

North American real estate market trends

Offices

As we head into 2024, office values should continue correcting downwards, given the now-apparent permanence of hybrid working.

Seller expectations have fallen, as more office assets are brought onto the market at steep discounts. A recent example was the AON Centre in Los Angeles, which was sold for 45% less than its last price when Shorenstein originally bought it. The sale price was also 32% less than its listing price 11 months ago of around $220 million.

New leasing for offices seems to have stabilised 20% below the 2015-19 average, which puts absorption deep in negative territory. With weaker job growth and reduced space requirements expected over the next three years, this doesn’t bode well for office performance.

Even when looking at relatively new buildings (3-10 years) on their first cycle of leases, demand has been hard to maintain. Sublease availability has increased from 1.5% in 2019 to over 6% now, and more negative absorption is expected as the balance of pre-2020 leases expire.

Industrial and logistics 

After seeing exceptional growth over the past few years, driven by the strength of ecommerce penetration and manufacturing reshoring activities, 2024 is likely to be a period of normalisation.

Construction has quickly ramped-up since the beginning of the pandemic, in response to intense demand. As a result, most of the supply that was initiated then is now being delivered. At the same time, demand has cooled as consumption has shifted from goods to services. A higher-for-longer interest-rate environment has also made inventory management challenging.

The supply chain is also shifting to be more land-transport reliant because of the effects of near-shoring/on-shoring. This is demonstrated by new trade corridors being proposed, such as the Puerto Verde Global Trade Bridge. This should prop-up demand on the land borders. We expect demand to be strong over the next few years for markets with intermodal terminals that sit in the path of newly formed freight rail lines and newly conceived trade corridors.

Retail

Retail remains strong, led by strip retail, open-air lifestyle centres, and standalone retail spaces in the Sunbelt and mid-western markets. 

High construction costs in 2023 discouraged new construction, which will ensure a scarcity of new retail spaces. Only a small number of markets could demand asking rents to justify new construction. CBRE’s cost consultancy group reported that retail construction costs rose by 6.5% in 2023 and will continue rising in 2024.

That said, consumers will find 2024 challenging as a lack of affordable housing, high interest rates, and an expected recession take hold. We think that discretionary consumer spending will be subdued in the near term, which will lead to occupiers rethinking their expansion plans. Hence, we’ll probably see weaker leasing activity this year.

While lower levels of leasing activity usually don’t sit well, the current slow demand should still translate into positive returns over the next three years. With little new supply and tenants competing for limited options, landlords should retain pricing power.

Multifamily

With 440,000 new units expected in 2024, we expect overall vacancy rates to rise and for rental growth to decelerate further. However, multifamily construction starts are now significantly lower, in response to weakening fundamentals and high interest rates.

New starts are expected to fall 45% this year, compared with their pre-pandemic average. Interest rate hikes and higher debt costs have also stalled a few project proposals, which have created delays at building sites. This means that supply could normalise quickly by 2025.

Demand for east-coast hubs is expected to remain strong. With high barriers to home ownership and limited supply, vacancy rates for the east-coast markets should stay tight.

However, the Sunbelt will probably continue to struggle this year with rental growth, as supply pressures mount. But on the bright side, the rental correction in the Sunbelt could promote in-migration, which could lead to rental growth in the later half of 2024.

Outlook for risk and performance 

We are bearish on US offices, as occupiers struggle to get employees back into the office. Weekly physical occupancy seems to have plateaued at around 50% nationally. Effective rental growth will be weak as sublease availabilities force direct landlords to entice occupiers with increasingly large concessions. We are even seeing an increase in subleases for buildings on their first leasing cycle. Recovery for the office markets will be a long and played-out affair. A large amount of inventory still needs to be withdrawn before we see an improvement in the supply/demand dynamics.

Established east-coast population hubs are proving positive for multifamily. Despite the large national volume of deliveries, supply in the east coast is expected to remain limited. Pockets of forced sales may come up on smaller properties in the east-coast and Sunbelt markets. These are likely to be for properties financed between 2020-2022. This could offer buying opportunities.

We like strip retail, lifestyle centres, and standalone retail, particularly grocery or discount-store-anchored properties in the Sunbelt and Midwest. These should benefit from higher population growth and the limited supply pipeline, but they will face headwinds as economic conditions deteriorate.

We are bullish 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 friend-shoring becomes more prominent. Recent infrastructure upgrades to the ports of Savannah and New Jersey should attract more shippers because of nearshoring/onshoring opportunities. Land-border traffic is expected to grow because of nearshoring. This is expected give a boost to markets with established intermodal terminals, such as Chicago and Dallas.