Five Economic Developments We Hope Won't Unfold

All eyes (and ears) remain focused on the Federal Reserve as interest rates remain the catalyst for good things and bad when it comes to investing, including in commercial real estate.

The next Fed meeting is Nov. 1. Marcus & Millichap’s National Director of Research and Advisory Services, John Chang, shared the five things his firm is monitoring that could trip up the Fed’s efforts to achieve a soft landing and avoid a recession during a recent news video.

The biggest question Chang has had all along is: Will the Fed go too far?

“Investors always need to consider their downside risk, and now that most economists are leaning toward a more positive outlook, [you must] make sure [you are] covering the potential risks as well.

The first on his list is the Federal Reserve.

They could still raise rates too much or they could hold them too high for too long into 2024, he said.

At the last Fed meeting in September, 12 of the 19 voting members of the Federal Open Market Committee indicated they believe one more rate hike will be needed this year.

“That doesn’t mean they will still think that way when they make their next rate decision on Nov. 1, but it is a risk,” Chang said. “Many of the Fed decision-makers think they’ll need to keep rates elevated through most of 2024, and that could also create economic risk.”

Secondly, will there be a significant pullback in consumption?

Retail sales growth has already begun to flatten out and the excess savings built up during the pandemic that has been fueling a lot of the spending will likely burn off by the end of the year, Chang said. On top of that, student loan repayments have restarted and that will reduce the discretionary spending of about 44 million people.

A third downside risk is tied to interest rates.

“Not only do commercial real estate investors face significantly higher interest rates as debt comes due, but so do businesses and consumers,” Chang said.

“As companies roll over their debt, they’re going to have to deal with much higher rates, just like real estate investors are.

“And that could be a problem for some companies, especially the ones with significant leverage.

“As debt comes due and companies roll it over at a higher interest rate, money will be taken away from other investments, like growing infrastructure or hiring more staff.”

That could emerge as a challenge for the economy, he said.

A fourth potential recession driver could come from the banking and financial system.

“Although it looks like banks have stabilized, at least compared to last spring, there’s still a possibility their balance sheets could be impacted as debts come due,” Chang said.

“That could be commercial real estate mortgages or business loans or consumer loans or something else. If even one significant bank runs into collection problems or debt maturity problems, we could see another bank run that could squeeze the liquidity out of the lending markets.”

No. 5 would be potential extraneous events.

Chang said things that could drive a shock through the economy include a government shutdown, major union strikes, surging oil prices, global geopolitical risks, or a global recession, etc.

“These types of issues are always out there and although it doesn’t look like a major issue is imminent, we always need to be vigilant,” he said.

Chang, however, reiterated that right now, the economic outlook through the remainder of this year looks solid and he expects total annual growth in the 2% range for 2023.

“Although most economic forecasts for 2024 aren’t huge, they are positive with consensus estimates of about 1% growth,” he said. “If we hit those numbers, 2024 could be a very solid year for commercial real estate.”