Handicapping the Hard-, Soft-, and No-Landing Scenarios for CRE

Investors of all stripes have been watching economics predictions as though sitting on a plane. Would the landing be soft? Hard? Will disturbing conditions leave the aircraft circling the airport? Or is a tricky and dangerous landing in the offing?

Marcus & Millichap Senior Vice President of Research Services John Chang recently explored the possibilities. There are four essential cases: soft landing, hard landing, no landing, and stagflation. Chang went through the list.

• No landing means strong economic growth with inflation remaining high.
• Stagflation sees the economy stalling but inflation remaining elevated.
• A hard landing refers to reduced inflation resulting from a recession.
• Soft landings are when inflation falls but there is no recession.

You could add the labor market. Under stagflation, unemployment increases sharply. A hard landing would likely see the same. Soft landings see stable employment.

Chang reviewed a few metrics. “The annualized three-month course CPI reading surged to 6.6% in March, its highest reading in a year,” he said. “At the same time, March job additions jumped to 310,000 positions, the most job creation we’ve seen since January 2023.

That made the no-landing solution look possible but more recent inflation data began to moderate. “Core CPI on a trailing three-month average came back down to 4.1% in May, and the month-to-month trend has been positive,” he said. At the same time, job creation has slowed, particularly as GlobeSt.com has previously reported, there have been more downward revisions of recent months’ numbers than upward.

“Chairman Powell probably said it best,” explained Chang. “He said, ‘I was around for stagflation, and it was 10% unemployment and high single-digit inflation. Right now, we have 3% economic growth, which is pretty solid, and we have inflation running under 3%. So, I don’t see the stag or ‘flation.’”

That leaves two possibilities and “we are walking a tightrope” in which a soft or hard landing could be possible. “If the Fed holds rates too high for too long, or if we’re hit by some other unexpected economic curve ball like very severe weather, a major geopolitical event, or a major supply chain disruption, then a recession is possible,” he said. “Some key indicators suggesting an impending economic softening include the ISM manufacturing index, which came in at 48.7 for May.” Unemployment has moved up to 4% and consumer sentiment and confidence have been level.

The balance is that a recession could be possible, but something would have to knock the economy into a downward move. At the moment, Chang sees a soft landing as still the most likely outcome. “Our baseline scenario, the soft landing, likely brings mildly positive space demand with the hope of a Fed rate cut later this year.” There are still risks, “which is why you always need to keep your eyes on the horizon.”