Economy & Policy
U.S. Real Estate Market Outlook 2024
Despite Certain Downside Risks, U.S. Will Avoid Recession
Despite easing inflation, the U.S. economy will face certain headwinds in early 2024, including relatively high interest rates, a strong dollar, near recessions in Europe and China and continued geopolitical conflicts.
Resilience will come from the U.S. consumer, so often the mainstay of the global economy. Consumer balance sheets are strong and wage growth will outstrip inflation for at least the first half of 2024. As a result, spending on services such as health, leisure and hospitality will provide vitality and some job growth.
There is an increased chance that the U.S. will avoid a recession and achieve a soft landing in 2024. There will be an economic slowdown and downside risks will be elevated but the unemployment rate will rise to only around 4.5%, which won’t materially weaken real estate fundamentals except in the office sector.
Figure 1: U.S. Consumer Wealth Index
Source: Oxford Economics, Federal Housing Finance Agency, Standard & Poor's, Haver Analytics, CBRE Research Q3 2023.
Inflation Expected to Ease
The inflation rate will start the year at around 4% but fall steadily to around 2.7% by year-end. A weaker global economy will keep commodity prices muted, while a return to pre-pandemic supply chain efficiency will buoy the auto industry and an increase in labor supply will temper wage growth to more sustainable levels. Core inflation could even surprise on the downside due to tight credit conditions and broader weakness in the global economy. Upside risks to headline inflation include geopolitical conflicts and oil production cuts. Construction cost growth that has been limiting new development will ease in 2024.
Figure 2: U.S. Consumer Price Index (Y-o-Y Change)
Fed Will Begin Lowering Rates
Despite the risk of higher headline inflation if oil prices rise in 2024, the U.S. Federal Reserve will mainly focus on core inflation, which excludes food and energy prices, and the broader risks from the global economy and the banking sector. The Fed will reduce short-term interest rates to around 4.25% by year-end 2024 and to 3.5% in 2025. This would be a much slower pace than during previous rate-reduction cycles due to the resilience of the U.S. economy. If the downside risks materialize, the Fed can lower rates more quickly due to the decline in inflation.
Gently falling interest rates amid generally solid real estate fundamentals will revive real estate capital markets activity above its currently very depressed levels. However, the federal deficit, which ended fiscal year 2023 at 7.5% of GDP, likely will not be reduced by much in 2024, keeping the 10-year Treasury yield high relative to the past decade, even as inflation eases.
Figure 3: Government Revenue (Deficit) as a Percent of GDP
Source: Flow of Funds, National Income Product Accounts, Haver Analytics, Oxford Economics, CBRE Research, Q3 2023.
Figure 4: U.S. 10-Year Treasury Yield
Podcast | Intelligent Investment
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Our annual must-listen episode. Chief Economists Jim Costello (MSCI Real Assets) and Richard Barkham (CBRE) prognosticate on the global economy, interest rates, capital markets and investment opportunities across commercial real estate sectors.
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