United States economic outlook

Activity

 The pace of US growth appears to be moving down a gear. Consumer spending has slowed, last year’s surprise fiscal stimulus is fading, and investment remains subdued amid high interest rates. These dynamics should persist in the coming quarters. We expect annualised growth of around 2% for the second quarter of 2024, and between 1.5% and 2% for the rest of the year. Admittedly, we still see the risk of a ‘no-landing’ scenario (in which growth and inflation remain strong) and a more abrupt slowdown. However, our base case is that the economy can walk the tightrope between both.

Inflation

Inflation has slowed in recent months. We expect this softer rate to persist, helped by a normalisation in those components that spiked over the first quarter. These included portfolio management and recreational goods prices, slower housing inflation, and an ongoing easing in the labour market and wage growth. Indeed, we expect an average monthly rate of 0.2% in core personal consumption expenditure during the rest of 2024. This should give the Federal Reserve (Fed) confidence that inflation is back on track – even if this leaves the year-on-year rate treading water between 2.5% and 3%.

Policy

The Fed delivered a hawkish surprise at its June Federal Open Market Committee (FOMC) meeting. The Fed signaled that it expects one rate cut this year, instead of three when last surveyed in March. The Fed is now expected to wait until December to cut, unless inflation data is very weak, or activity indicators look more concerning ahead of its September meeting. We think equilibrium rates remain low, which could provide more room to cut later in the cycle, but there is a risk that the rate structure has shifted persistently higher.

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

North American real estate market overview 

We’re not expecting prices to move much in the immediate forecast period. Overall, we should see capital values decline around 2-3% over a rolling one-year period.

The industrial sector should experience moderating rental growth as absorption slows. Prices should be relatively stable for the first year of our forecast. East-Coast and Midwest industrials should outperform their Western counterparts over the forecast period.

We think the bifurcation will widen between offices with strong and weak amenities, and between offices on the West and East Coast. New supply-constrained East-Coast markets, such as Boston and New York, should perform well, relative to West-Coast markets.

In the retail sector, weak supply numbers for strip retail are cause for some near-term positivity, but we’re not confident that this will translate into long-term real rental growth.  

North American real estate market trends

Offices

National office attendance has plateaued across the country at around 50% and shows no signs of improving much further. Ultimately, this doesn’t bode well for absorption in the forecast period.

Many major markets also still face the rollover of large blocks of space that were leased before the pandemic. Nationally, 55% of lease deals of over 10,000 square feet are at risk of churn. These factors will result in higher vacancy rates (which are already at a record high), despite slowing construction.

At the market level, a geographical bifurcation will be apparent, with the supply-constrained East Coast outperforming the technology-led West Coast.

At an asset level, we expect the preference for well-amenitised offices to drive performance.

Industrial and logistics

We expect industrial rental growth to moderate, given absorption slowed to 75% below 2022’s level in the first quarter of 2024. This was the weakest first-quarter figure since 2012. Weaker third-party logistics have forced big-box facilities to close. These assets were primarily used during the stimulus-fed spending boom of the pandemic. But on a net basis, the industrial and logistics tenant base is still growing, albeit at a slower pace. On-shoring and near-shoring are key drivers over the forecast period, especially in the upper Midwest and Gulf Coast. The high supply barrier on the East Coast should also drive performance in markets, such as northern New Jersey and Atlanta.

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

Retail 

Restrictive monetary policy, fading support from savings stock, and an easing in terms of the labour market and wage growth, may spell headwinds for the retail sector. However, retail availability is tight, with only 739 million square feet of space available across the US, which is 15% below the previous five-year average. New retail completions are also expected to remain muted in the foreseeable future, given higher construction costs. 

Bifurcation between malls and other types of retail will also become more pronounced. The availability of strip centres and power centres is expected to remain tight. Mall space should rise for the foreseeable future, as mall-based retailers look towards neighbourhoods and power centres to reposition their footprint in areas with stable foot traffic.

Overall, we are positive about the retail sector in the near term. That said, we’re not confident that the lack of supply will translate into real rental growth in the later years of the forecast period. Retail sales should stabilise, the pool of tenants seeking space should become shallower, and routine retail bankruptcies should provide access for new tenants to move in by taking over leases.

Multifamily

Multifamily is tackling oversupply, but units under construction are steadily falling toward their pre-pandemic level. The current forecast is that 533,000 units will be completed by the end of 2024 – 10% below the 2023 level. 

However, Sunbelt markets will have more completions, notably in Austin, Tampa and San Antonio. 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, vacancy rates for the East-Coast markets should stay relatively tight.

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

Outlook for risk and performance 

The outlook for US offices is still negative, 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 the availability of subleases forces landlords to offer higher concessions to attract tenants. There’s also the impending lease turnover risk to consider, which may lead to even higher vacancy rates.

We favour established East-Coast population hubs in the multifamily sector. Multifamily assets could also perform well in Washington DC, given its strong renter base amid the uncertain political background this year. However, the Sunbelt will be very weak, as excess supply is absorbed. Pockets of forced sales may become more prominent for properties transacted and financed between 2020-2022, which could offer buying opportunities. Overall, we think multifamily will struggle in this coming year, but a delayed supply response should re-accelerate rental growth and capital values in 2026.

We like strip retail, lifestyle centres, and standalone retail – particularly grocery or discount-store-anchored properties in the Sunbelt, Midwest, and the East Coast. These should benefit from higher population growth and a limited supply pipeline. But rental growth for these properties is likely to weaken, as retail sales stabilise and the pool of tenants seeking space becomes shallower.

We like 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. Land-border traffic is expected to grow because of near-shoring. This should boost markets with established intermodal terminals, such as Chicago and Dallas.