January 2024: Regional Vibrancy Struggles in the Face of Higher Interest Rates, but Optimistic Signs Emerge

REVIVE, our Regional Vibrancy Index, continues to show clear signs of struggle against the effects of higher interest rates. The Greater Washington region currently stands at 54.1, 4.5% lower than December. However, there are signs of stabilization— particularly in the real estate sector.

The REVIVE index measures the strength and activity of key drivers in the Greater Washington region, including private industry, the federal government, real estate and labor markets. It ranges from a low of 0 to a high of 100.

The region peaked at 76.5 in December 2021 and reached its lowest point of 26 during the 2009 Global Financial Crisis. Since the Federal Reserve began increasing rates in early 2022, commercial and residential real estate, as well as the regional banking sector, have been negatively affected. This has led to lower valuations, reduced transactions and less lending activity, dragging down the overall index. The labor market, though relatively resistant, is showing signs of weakening. Political infighting has resulted in slow federal government legislative activity, which has trickled into the region’s contractor and lobbying bases.

There are positive signals in the data, mainly due to the expectations of stabilizing or lower interest rates in 2024. These expectations have helped stabilize declines in pricing and transaction activity in residential and commercial real estate over the last two months. Distress in commercial real estate, ironically, will create a floor to the market and increase activity levels. Earnings from the region’s largest employers and banks have experienced a boost from the end of the rate hiking cycle; we anticipate this trend to continue throughout 2024. Additionally, the historically sluggish federal government legislative activity should adjust as it typically does in the second year of Congress, even in presidential election years. Despite weakening labor markets, the region’s unemployment rate is hovering near its lowest in 23 years.

While there are some positive indications that may support the region’s better future performance in the REVIVE index, the impact of higher interest rates is still weighing on the region's vibrancy and may further weaken labor markets. The improvement in the real estate sector may be slow, reducing the likelihood of a significant change in the trajectory of the region's vibrancy and the REVIVE index in the near term.