Economists: Rate Cuts Will Help Commercial Recovery


Some of the progress markers that will indicate the Fed is headed to a rate cut includes commercial property price stabilization and land and single-family development.

WASHINGTON – The commercial real estate market has a lot to gain if the Federal Reserve follows through on anticipated interest rate cuts this year. It was under high interest rates that the number of commercial transactions dropped by 60% in 2023 compared to 2021, National Association of Realtors® Chief Economist Lawrence Yun said Thursday at the association’s quarterly Real Estate Forecast Summit. Lower interest rates would mean recovery for the industry and collateral value, as well as more transactions and leasing activity.

The Federal Reserve will base the timing of interest rate cuts on certain data points. One of those points is consumer price inflation, which is currently at 3.1%. The goal is to be at 2% or a little lower. “You may scratch your head and ask, ‘Aren’t 3% and 2% pretty much the same?’” said Yun. But in economics, 2% is preferable to 3%, he added.

Despite the need to hit the 2% mark, Yun said he anticipates these progress markers:

  • The Fed is likely to make four to six rate cuts over the next couple of years. “Whatever doesn’t happen this year will simply be extended to next year. Inflation will be much calmer later this year and as we go into 2025,” Yun said.
  • The 10-year Treasury yield is likely to settle at 3.5%.
  • Commercial property prices are likely to stabilize and recover, though challenges remain in the office sector.
  • Moderate growth in the GDP is likely to still add to net leasing and investment sales.
  • Land and single-family development likely will do well.

Economists and the Fed are analyzing rents as a key data point in the ongoing interest rate evaluation, Yun said. Much of the data indicates that rents aren’t rising to the degree the Consumer Price Index is showing. Using a different data set could influence monetary policy, and commercial real estate depends greatly on the path of monetary policy. “Measurements of how rents are growing is a key input into how we measure inflation,” said Igor Popov, chief economist at Apartment List. “And, of course, how we measure inflation is key to determining what the Federal Reserve will do next.”

The CPI data comes from the Bureau of Labor Statistics, which measures what Americans are paying for rent. But when the price of rent spikes and then cools, renters don’t feel it until they renew their lease or move – and that takes time. Popov said his company’s research has shown a lag between the CPI’s rent estimates and what’s actually happening in the market. “We know that market rent growth peaked almost six quarters ago. It takes time – we now estimate it takes about six quarters – for most of the rent deceleration growth to factor into the CPI,” he said.

In analyzing rent growth in metro areas, Apartment List identified the Sun Belt as the U.S. region where rents are declining the fastest. Austin, Texas, is leading the way, followed by Atlanta; Jacksonville, Fla.; and Raleigh, N.C. These cities also are seeing job growth and attracting renters as residents.

The big story here is supply, Popov said. The Sun Belt has a large number of multifamily units coming on the market, causing significant pricing pressure. Those areas are coming down from their peaks, as renters have greater options with new lease-ups coming to market. So, these metros aren’t becoming less popular among renters or seeing lower job growth than other places. They’re giving renters more options and reducing rents.

On the other hand, Midwestern markets dominate the list of metros with the fastest growing rents: places like Grand Rapids, Mich.; Milwaukee; St. Louis; and Louisville, Ky.

Vacancy rates continue to grow in the multifamily sector, Popov said. “In our national vacancy index, we’ve seen vacancy rise and, conversely, occupancy fall consistently for the past 28 months. At the end of the 2021 boom, there were very few chairs left in the game of multifamily musical chairs. But the market has continued to ease.”

Nearly 1 million multifamily units are under construction today. Popov’s company expects more than half of them to hit the market in 2024. This will continue to put downward price pressure on rents, he said.

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