Experts are debating whether the U.S. economy will hit a soft or a hard landing – but one major CRE consulting company is predicting the best-case scenario.
It comes from CBRE, which made the prediction after viewing the inflation data from the second quarter.
“We continue to expect a soft landing for the economy, with slower inflation and a more balanced labor market this year,” it wrote.
The debate of hard and soft landing
However, not everyone is as bullish as CBRE. Marcus & Millichap SVP of research services John Chang, expressed concern about the unemployment rate ticking up to 4.1 percent, which is the third consecutive month the figure has risen. In June 2023, the unemployment rate was 3.6 percent.
“A lot will be riding on the July unemployment rate that comes out on August 2, which just so happens to be two days after the next Fed meeting where they’ll decide what to do with interest rates,” Chang said.
To slow down inflation, the central bank was busy hiking rates in 2022, and 2023. But the Fed hasn’t taken action since last July. As of July 25, 2024, the federal funds rate was 5.33 percent.
The key is to make borrowing more expensive, resulting in consumers getting more cautious about spending. But it also can be counterproductive to companies with more expensive loans. To cut costs, they may lay off employees, which could explain the spike in jobless claims.
Rate cuts could be looming
But the days of sky-high inflation are gone – at least for now. The consumer price index increased by only three percent in June from a year ago. Sure it’s a little higher than the two percent the Fed would like it to be – but the central bank is at the point where it may have to reverse course.
“We also expect that lower inflation will prompt the Fed to make two 25-basis-points interest rate cuts in 2024 and that the 10-year Treasury yield will end the year at 4.0%,” CBRE said.
But at the same time, the Fed needs to be careful about cutting rates too much. That could bring elevated inflation back from the levels seen in 2022, which at one point exceeded more than nine percent. A balance needs to be found.
Outlook and state of the economy
Meanwhile, as of now, the economy looks like it’s in a stable place, at the very least. GDP in the second quarter inched up by 2.8 percent, and was ahead of the market expectation of 2.1 percent, according to CBRE.
The only issue with the Fed cutting rates is that GDP growth could be limited, it further noted.
For the commercial real estate sector as a whole, CBRE sees a mixed bag. The negative is the high interest rate environment is hindering activity in the capital markets. But it does expect demand to pick up in the second half and into 2025, with more investments set for real estate.
Lower inflation, coupled with rate cuts, will lead to higher industrial and office leasing activity, CBRE projects.
For 2024, CBRE sees the Fed funds rate ranging from 4.75 percent to five percent. In 2025, it estimates that it will be between 3.75 percent and four percent before falling in the range of 2.25 and 2.50 percent during 2026-2028.