What’s ahead for the economy?
CBRE expects that economic growth will slow to 1.2 percent in 2024. However, CBRE thinks that there is an increased likelihood that the U.S. economy will avoid a recession. The report predicts that unemployment will rise to 4.5 percent by the end of the year but that inflation will fall to 2.7 percent.
CBRE expects short-term interest rates to fall to 4.25 percent by end of 2024 and to 3.5 percent by the end of 2025. However, large Federal deficits in the range of 7.5 percent of GDP will keep longer-term rates, such as the 10-year Treasury, high compared to the last 10 years. Federal government deficits had been running around 5.2 percent of GDP before the pandemic.
CBRE expects that 10-year Treasury rates will reach 3.4 percent at the end of 2024 and average 3.3 percent from 2025 to 2028.
The economic outlook report predicts that commercial real estate investment activity will be subdued in the first half of 2024 but will pick up in the second half. Investment volume dropped 45 percent in 2023 and an additional 5 percent drop is expected in 2024. However, the report notes that there is more than $250 billion sitting on the sidelines waiting for the right time to invest. This money should start to move into the market as the interest rate environment stabilizes.
CBRE expects cap rates to rise 25 to 50 bps in 2024, peaking in late Q2 to early Q3. Cap rates should then start to decline through the end of 2026.
The report estimates that CRE losses could be $60 billion over next several years. Funding gaps will be an issue as property loans mature. CBRE estimates that the gap will be $157 billion overall with $113 billion of that in office properties. However, multifamily properties with short term debt financing may also contribute to the funding gap.
Multifamily must deal with new supply
CBRE estimates that there are 900,000 multifamily units under construction with 440,000 unit deliveries expected in 2024. While 17 of the 69 markets tracked by CBRE are expecting deliveries above 7 percent of stock in 2024, including 5 markets will deliveries of more than 10 percent, the highest deliveries are expected in the markets with the highest job growth. Therefore, CBRE expects the new supply to be largely absorbed. CBRE expects that the average occupancy rate will remain above 94 percent.
Looking ahead, the economic outlook report predicts that multifamily unit starts will fall by 45 percent from pre-pandemic average of 70 to 80k units/quarter. Starts will be down 70 percent from the 2022 peak. This will lead to reduced supply starting in 2026 and a subsequent recovery in rents and occupancy.
The Midwest and Northeast will have strongest rent growth through mid-2024 due to low supply and rents that did not run up as much as those in other markets in recent years.
Investment opportunities are expected to appear in Sun Belt markets as loans there mature and require refinancing under current conditions.
Apartment demand will be supported by high mortgage rates and home prices. CBRE expects the average mortgage payment to remain 35 percent above the average apartment rent in 2024.
The CBRE economic outlook report also discusses the prospects for office, retail, industrial, hotels and data centers. The outlook report and its associated video presentation is available here.