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It’s no secret that 2022 was an uncertain year for investors. We saw interest rates on loans rise to levels not seen in over a decade, economic growth decelerate, and market volatility increase. Persistent supply chain disruptions stymied stimulus-fueled consumer demand leading to decades-high inflation, made even worse by the war in Europe.
It was a difficult year for equity markets. The S&P 500 fell by almost 20% over the year, the Nasdaq 100 lost a third of its value, and the Dow Jones Industrial Average went down by almost 10%. In addition, bonds plunged and yields increased. This caused the residential and non-residential markets to come to a complete halt.
In a market like this, it’s important to have a strong understanding of what’s forecasted before making your next investment.
Perhaps we have seen peak inflation in the rearview mirror. And with supply chains easing and transportation costs coming down, costs of physical goods, which have been in such high demand during the pandemic lockdowns, have been on a downward trend for the past few months.
A major contribution to inflation in the service sector has been rising home costs. However, housing costs and rental rates across the nation are lowering, or simply not rising as quickly, so that factor will likely be less of an issue later in the year.
Economists are expecting to see inflation ease in 2023, but not fall back to pre-pandemic levels. Until inflation is much more strongly on a path to going down, the Federal Reserve has vowed it will continue to push the rates higher.
“After bumping the overnight lending target rate higher by 425 basis points in 2022, the fastest rate increase program since the 1970’s, the Fed has moved rates into restrictive territory to cool the economy. An additional 75 basis points are expected in the first half of 2023,” predicts CoStar.
Some economists are convinced the Fed will change their strategy and begin cutting rates as the economy slows, but all statements from Fed Chairman Jerome Powell appear firm on that path, and the committee members themselves forecast rates to stay higher for longer. The Fed appears confident about further tightening because the labor market has remained sturdy. This gives policymakers more room to keep the pressure on rates (without causing severe pain to households). But a robust labor market will only last as firms keep adding to their payrolls.
With higher rates, higher labor costs and other input costs, businesses are tightening margins as consumers are becoming more price conscious and no longer blithely accepting the price increases that would keep their margins intact. So, the business sector is experiencing some cooling demand for its products and services and many firms are reporting weaker profit margins. This will likely result in slower hiring and a drag on capital investment.
In addition, one notable pull back has been within residential construction, which has fallen for the past six quarters as the housing market felt the effects of doubled interest rates. The manufacturing sector has fallen into contraction territory as well, and the services side of the economy is slowing. With both orders and backlogs declining, firms may be less likely to add more jobs. Only time will tell.
Slower hiring, or even job losses, means household incomes will fall, and that is a risk to consumer spending which accounts for about 70% of the economy.
If both businesses and consumers were to find themselves floundering, the economy would generally be expected to fall into a recession. How long, or how severe that downturn would be is anyone’s guess– and there are plenty of predictions. It will ultimately depend on how businesses amass their labor, how much consumers refrain from spending, and eventually, how far interest rates fall in incoming months to stimulate the economy again.
To stay on top of market trends, investors must pay close attention to indicators such as GDP growth, inflation rates, and employment data. The labor market has been slowing over the past year, but the number of jobs being added is still far above the number the Fed believes is consistent with non-inflationary rate of hiring, or the rate that keeps wages from rising too quickly so as not to fan inflationary flames.
The 2023 commercial real estate outlook indicates there may be challenges ahead. Unless the Fed changes course, 2023 will be characterized by slower GDP growth as monetary policy continues to tighten and global economies adapt to inflation. That translates to less credit and lending activity, and continued volatility for asset pricing.
But there’s nothing new about commercial real estate’s cyclical nature. Property owners and investors with fortress balance sheets understand how to take advantage of those ups and downs. There may be overleveraged building owners during an economic downturn. That presents prepared owners and investors with an opportunity to grow their portfolio at a lower cost.
In addition, investors can use leasing activities as a hedge against inflation. With current interest rates and market values, many consumers are looking to lease rather than buy. Property owners and investors aren’t immune to cost increases, but they can adjust rents to account for market changes.
Thankfully, we are located within Dallas-Fort Worth, one of the fastest growing labor markets in the country. Between 2019 and 2021, D-FW added 59,000 workers in professional and business services, a gain of 8.9%, according to data from the U.S. Bureau of Labor Statistics. In contrast, New York, Los Angeles, and Chicago had net declines in those workers over the same period (Dallas Morning News). With secure job growth, being positioned within D-FW is one of the greater advantages for commercial investors.
Regardless, commercial real estate investors need to stay up to date on current market trends, interest rates, and the job market.
It is important to have a knowledgeable agent who can help navigate you throughout this difficult market. Especially someone who is a market expert and will be honest with you about your investment needs and decisions.
At M&D Real Estate, we have 5-star agents who are ready to guide you through this market. Whether you are trying to sell your assets, purchase a property, need project leasing services, tenant representation, or simply want to grow your portfolio, contact an M&D agent today where you know you will be in safe hands.
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