Soft Landing Still Possible for U.S. Economy: Moody’s

A soft landing is still possible as the US economy enters a transition phase, a leading CRE analyst told attendees at the GlobeSt Fall Net Lease conference last week in Los Angeles.

“The economy will transition,” Natalie Ambrosio Preudhomme, associate director at Moody’s Analytics, said Tuesday. “There will be further softening, but no cliff. We expect to see a small increase in growth in the near term.”

Preudhomme says Moody’s expects the labor market to remain steady but unemployment to increase to hit 3.9% by year-end and peak at 4.2% sometime next year. Occupancy and rents are expected to struggle “a bit” in the near term as well, but Preudhomme said the overall expectation is that the financial system will remain “fairly stable.”

Recent Moody’s data shows that wage growth continues to outpace inflation, in what Preudhomme called good news for consumers. She cautioned, however, that it may take longer to reach back down to the US inflationary target.

“We expect the July rate hike was our last increase in this current tightening period,” Preudhomme said. “We are in the higher-for-longer camp; our one-year baseline forecast is hovering around 4 for the foreseeable future.”

Preudhomme said “sentiment continues to be far worse than reality” for the beleaguered office sector, noting that leasing activity picked up during the spring and summer of 2023 while vacancy has remained relatively stable.

And while vacancy rates are hovering at close to the last-observed highs – currently, vacancy across the top 50 US metros clocks in at 18.8% — Preudhomme said “office restructuring began long before the pandemic” and “office obsolescence began long before the work-from-home craze.” Challenges will continue to persist for Class B and C stock in central business districts, however.

“This is the oversupply office stock,” she said. “It’s struggling and we expect that to continue.”

Meanwhile, retail seems to be on the up-and-up: while some indoor malls need t be demolished, she said, much of the overall sector is posting growth.

“Ecommerce will chip away at industry laggards but many companies have adapted and can adapt,” she said. “The key fundamentals of retail locations do continue to be most important.”

In the industrial sector, flex R&D and warehouse distribution properties have seen a bounceback after a slow start. The latter has seen “substantially more construction,” according to Preudhomme, which she says suggests “much more absorption activity and persistent tailwinds.”

Preudhomme also addressed what’s happening in the capital markets, saying “the  credit domino is starting to topple but hasn’t quite fallen.” Maturities will drive delinquencies further, particularly for office, where 80% of loans maturing in the next year face challenges (and 55% face “significant” ones).  Industrial leads in payoffs of maturing loans at 100%, while retail payoffs (excluding malls) are at 90.3%.