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The United States is entering a new economic era as the Federal Reserve has been hiking its benchmark interest rate.

Interest rates today stand above 5% as the Fed tries to slow the economy down and fight inflation. As interest rates climb, economists say financial conditions are headed back to being more normal.

“Having interest rates at zero for such a long period of time is very unusual,” said Roger Ferguson, a former vice chair at the Federal Reserve. “Frankly, no one ever thought we’d get to that place.”

Back-to-back financial crises gave past Fed policymakers the conviction to take interest rates as low as they can go, and keep them there for extended periods of time. Along the way, they disrupted the basic math of personal finance and business in America.

For example, the Fed’s unconventional policies helped to sink the profits investors received from safe bets. Government bonds, Treasury securities and savings accounts all return very little yield when interest rates are low. At the same time, low interest rates increase the value of stocks, homes and Wall Street firms that make money by taking on debt.

As the Fed hikes interest rates, safer bets could end up paying off. But old bets could turn sour, particularly those financed with variable loans that increase alongside the interest rate. A wave of corporate bankruptcies is rippling through the U.S. as a result.

“You’re, to some extent, limiting nonproductive investments that would not necessarily generate revenue in this high interest rate environment,” said Gregory Daco, chief economist at EY-Parthenon. “It’s very different in a low interest rate environment where money is free and essentially any type of investment is really worth it because the cost of capital is close to zero.”

In recent years, economists have debated the merits of zero lower-bound policy. As the Fed lifts that federal funds rate, policymakers warn that rates may stay high for some time. That could even be the case if inflation continues to subside.

“Barring a catastrophe, I don’t think we’ll see lower interest rates any time soon,” said Mark Hamrick, Washington bureau chief at

To view CNBC‘s ‘How The Federal Reserve’s Interest Rate Hike Are Reshaping The U.S. Economy‘, click the arrow below:


Source: CNBC

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After the last three years, there are few real estate professionals brave enough to make confident predictions about what will happen in 2023 — other than to say once again to expect the unexpected.

“We expect 2023 to herald a whole lot more of the same relative to 2022, and by that, I mean it’s likely to be a similar roller coaster ride,” Moody’s Analytics Head of Commercial Real Estate Economics Victor Calanog said. “It’s not all downs, it’s a lot of ups and downs.”

Commercial real estate enters 2023 pointing in the opposite direction as it did a year ago. The Federal Reserve has pushed its benchmark rate to 4.5% after starting 2022 near zero, a rapid change in the state of affairs that has ground sales volume to a standstill and killed deals around the country.

Rents at multifamily and industrial properties have soared this year, but amid the Fed’s aggressive campaign to rein in inflation, demand for both has started to come down. More significantly, demand for office space has never approached pre-pandemic levels, and office occupancy is still below 50% of what it was in most large markets.

Meanwhile, predictions of a recession next year — and whether the overheated recovery will end with a hard or soft landing — have intensified. Nothing is predictable these days but something of general consensus is taking place on apartment rents, the U.S. economy, return to office and how the Fed may behave in 2023.

It might not turn into a nightmare year along the lines of 2008 — but it certainly “won’t be pleasant,” CBRE predicted — and it will likely be defined by what doesn’t happen more than what actually does.

“I think we’re in for a tough road,” said Andrew Steiker-Epstein, the vice president of sales, leasing and marketing at New York developer Charney Cos. “I think you are going to see just very low transaction volume, and not a lot of things happening.”

Bisnow spoke to nearly a dozen industry leaders to gather predictions for the year ahead in CRE. Here is what stood out:

The Housing Crisis Won’t Abate, Even As Rents Stabilize

Eye-watering rent increases are expected to keep slowing down this year after posting records in 2021 and the beginning of 2022.

“The last of the Covid-era discounts will expire in 2023, bringing even more inventory to market,” said Diane Ramirez, the chief strategy officer of Berkshire Hathaway HomeServices New York Properties. “I think there’s going to be a lot of turnover of apartments. That’s going to help with supply, and with supply, you might get a little bit of an easing with prices, so I think the rental market is going to just become a little more normalized.”

Shimon Shkury, founder of multifamily sales brokerage Ariel Property Advisors, saidrental growth will no longer see a rapid ascent, but he doesn’t expect it to start coming down because “there’s not a tremendous amount of new product that is opening up.”

That spells bad news for the tens of millions of Americans who are paying more than 30% of their income on rent. The housing crisis isn’t going away next year — and it will likely get worse, Nuveen Impact Investing Senior Portfolio Manager Pamela West said.

“I’ve seen a ton of numbers quoted from different sources, but we’re somewhere between 6 and 7 million units in deficit of housing,” West said. “If we were to build 100,000 units per year of affordable housing, it would still take us 20 years to catch up to what we need. It’s just a ridiculous statistic and the needle moves every year, and so in 2023, it’s going to move again, and it’s going to move away from us.”

She said housing is a “purple” political issue and is on governments’ agendas more than in previous years, but the required urgency is not yet there, and it’s unlikely to show up in 2023.

“I don’t think we’ll go backwards on any policies, but my concern is that we’re not really going to move forward either,” West said.

Recession? Maybe. But Distress Is Coming

The predictions on the style of recession vary wildly, from deep to shallow to not coming at all.

“The market really hasn’t given up on the possibility that there will be a soft landing, that we’re going to avoid a recession,” Calanog said. “We think that the probability of a recession in the United States now lies between 55% to 65% over the next 12 months.”

Goldman Sachs, for its part, has put the chances of a recession at 35%. Almost uniformly, real estate players have arrived at the conclusion that some form of correction will come next year, particularly for deals made at the top of the market last year.

“We’re heading to what you refer to as a liquid recession,” said Ran Eliasaf, the founder of real estate private equity firm Northwind Group, which has $3B in assets under management. “It’s hard to say if we’re gonna hit a full-blown recession, or it’s just gonna be a milder one, but there’s definitely a big correction in pricing as well as valuation. That has to happen.”

Marx Realty CEO Craig Deitelzweig is predicting a “shallow” recession, characterized by companies shedding employees following the hiring spree in 2021. His company has been lying in wait for opportunities to pounce on assets whose owners aren’t able to withstand the current market conditions.

“Those opportunities have presented themselves in Washington, D.C., but in New York, the come to Jesus moment hasn’t yet arrived,” Deitelzweig said. “I thought we would see more in New York, but I’m hearing quarter one is when we’ll really start to see more of those opportunities. The firm will continue to look for assets in New York, and in other parts of the country like Atlanta and Austin. A lot of debt comes due in 2023, 2024,” he said. “They have debt coming due, and they either don’t have the capital to improve the buildings or they don’t have the wherewithal to do it.”

 “The bank pullback from CRE lending has already led to some borrowers seeking out debt funds like his for products like condominium inventory loans in New York,” Northwind’s Eliasaf said. “The quality of borrowers that need financing solutions increased, because they would usually get the solution from the bank and that doesn’t exist. I think we’re going to be very busy 2023 as well.”

A sluggish market makes for a tough time for appraisers, said Grant Norling, a co-founder at Valcre, a software company for appraisal firms, but next year is set to bring more activity for the industry as owners, and their lenders, face challenges with their assets.

“There’ll be other aspects of the other sectors of the appraisal industry that start picking up quite a bit,” Norling said. “Any bank that has troubled assets, or they’re looking at pre-foreclosures … they’ll want to be appraising their assets for loan monitoring purposes. So that portion of the industry we anticipate will fire back up.”

Office Usage Will Rise With The Threat Of Layoffs

Office usage is top of mind for 2023 across the board, with some predicting workers will try to ease their fears about the state of the economy by heading into the office more frequently next year.

“I think part of the reason why the sentiment has been weak on office is because a lot of companies have had challenges in fully mobilizing their employees back to the office,” Empire State Realty Trust Chief Operating Officer and Chief Financial Officer Christina Chiu said. “Tech layoffs, maybe some of the financial firms’ layoffs and how that rolls through the system, especially in light of rising interest rates and economic uncertainty … I think some of that will make it easier for companies to bring people back and get people more confident about the use of office.”

Deitelzweig predicted office occupancy will jump by 10%, while Shkury said he thinks usage “absolutely” is going to go higher. Steiker-Epstein of Charney Cos. said 2023 is more likely the year office owners accept the workplace is fundamentally altered.

“I think there’s going to be a slow trend of people coming back,” Deitelzweig said. “It’s never going to be near where it was.”

Calanog took another viewpoint: While employers might demand more workers back at their desks — and some are already doing so — that phenomenon might proved short-lived.

“Would you really feel good about working for an employer that uses the potential threat of layoffs to get you to go back?” Calanog asked. “Yeah, you might comply in the short run, and then guess who’s gonna be stepping up their résumé?”

Interest Rates Could Start Coming Down Before Year-End

Last week, the Federal Reserve hiked the benchmark interest rate half a percentage point, hitting its highest rate in 15 years. The targeted range reached between 4.25% and 4.5% — and Fed officials are now forecasting raises to be around 5.25% by the end of 2023. Real estate has a more optimistic take, however.

“I think that we peaked in terms of interest rate growth — I hope so at least –—and I think that there is some likelihood that we’ll see a lower interest rate environment in a year from now,” said Shkury, though he said he can’t predict that with any certainty.

“I think we’ll see a pause in March and they start dipping in June,” Marx’s Deitelzweig added.

“There are some who are talking about the possibility of rates coming down next year … There’s a number of folks in the last few weeks who are entertaining that possibility, giving a greater probability to that happening than they were weeks before,” Trinity Place Holdings CEO Matt Messinger said. “I am certainly more optimistic about the possibility of potentially opportunistically being able to refinance certain debt obligations at the tail end of ‘23.”

Industrial Down, Retail Up

Industrial real estate, long the darling of the industry, could be facing a challenging 2023.

 “The sector is suffering from lack of available space and limited new construction coming online,” said Turnbridge Equities Managing Principal Ryan Nelson. “This stagnation can be attributed to the current and impending capital market dislocation we are seeing and this will further exacerbate supply chain delays as industry players navigate finding space,” he wrote in an email. “From a developer’s standpoint, higher interest rate and the potential for a recession will threaten prospective industrial developments.”

Speculative construction has been the norm — of the record 700M SF of industrial space under construction in the middle of 2022, just 26% was pre-leased, according to Cushman & Wakefield.

“But while future development is still needed, construction will be limited due to capital market dislocation and distress,” Nelson said.

But in a complete reversal of fortune, there is a growing sense that the worst is over for the embattled retail market.

“The pessimists all said it would take years for the New York retail market to recover from the pandemic, but the numbers don’t lie,” Patrick Smith, who is vice chairman of retail brokerage at JLL in New York, wrote in an email. “By the close of 2022, we expect the number of retail leasing transactions this year to surpass that of 2019 and mark a return to normalcy as we go into the new year.”

Sublease space dropped nearly 11% last quarter and leasing velocity was up 7.4% year-over-year in Manhattan, per the brokerage.

“It seems that lenders have become more positive on retail, along with some buyers, under the notion that they’ve been downside-tested on multiple fronts: Covid-tested, internet-tested, e-commerce tested,” Chiu said.


Source: Bisnow

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Whether inflation first entered your adult life in the 1980s, the late 2000s or the first few years of the 2020s, the aftermath is more or less the same: emptied wallets and angry consumers.

And while some inflation is good (like the Federal Reserve’s annual target of 2%), too much is obviously not.

Amidst all the commentary that usually accompanies inflated economies, you may hear the word “hedge” thrown around quite a few times. And while many asset classes can help you provide a hedge against inflation, how can you utilize commercial real estate specifically as a hedge?

How Inflation Degrades National Currencies

In inflated economies, your average consumer ends up having to pay more for everyday items and conveniences than what may be considered average due to decreased purchasing power. Purchasing power, in this regard, refers to how much value of something you can extract with a single unit of currency (such as a single US dollar). In inflated economies, this decreases, and vice versa for deflation.

Illustrating Decreased Purchasing Power

This fall in purchasing power can be simply illustrated with a simplified example. Let’s say John Doe usually pays $100 a month for groceries in a regular economy. And let’s say that a large-scale financial crisis has just crippled that economy. As a result, consumers, now driven by fear of the unknown, start spending less and saving more.

Businesses in John Doe’s country, however, still need to make a profit, but this decrease in consumer demand is ultimately shrinking profit margins. So, these businesses start raising their prices to compensate. And these price increases accelerate even more when those businesses start paying more for raw materials and labor as a result of this financial crisis, creating a domino effect.

All of this creates an inflation rate of, say, 9%. This means that, if something cost $1 last year, it now costs $1.09 today. Each unit of that economy’s currency has lost 9% of its purchasing power, and John Doe will now pay $109 a month for groceries for the very same things.

What Does Inflation Leave Behind?

Ultimately, what inflation leaves behind is your average consumer having to pay more for everyday goods and services at no fault of their own. And while inflation can come about as a direct result of high employment and strong economic growth, there are a myriad of things to factor in a large, complex economy like price gouging or consumers getting higher-paying jobs. More impactfully are the consequences of macroeconomic factors such as global conflicts, financial crises and large-scale natural disasters.

Hedging Against Inflation

To hedge against inflation, you store your money in assets that appreciate in value over a certain period of time. Store here is a synonym for purchase. Gold is probably the most popular example of a hedge against inflation. As the purchasing power of the U.S. dollar falls, an ounce of gold tends to become more expensive as more investors buy it.

As such, the owner of that gold has successfully hedged against inflation. They can sell off that asset and receive more dollars in compensation than they originally invested, compensating for the drop in that currency’s purchasing power.

How Commercial Real Estate Can Hedge Against Inflation

Commercial real estate operates in a similar way to gold in inflationary environments. As the purchasing power of a currency drops, average property values tend to increase alongside new and existing commercial rentals as lease renewal rates increase. This is largely the case with properties that are already developed and have been around for some time. It’s likely that the interest rates on any loans taken out to purchase those properties were lower before inflation hit.

Once the Federal Reserve begins raising interest rates to combat inflation, the cost of owning the property for the owner stays the same while its value grows. This is not so much so, however, for properties currently or planning to be under development. Inflation often leads to increased costs for labor and materials, slowing down property development as a result. This means that demand for existing properties rises while demand for new ones falls, placing the odds all the more in favor of existing commercial real estate property owners.

Timing Matters

Commercial real estate as a short-term hedge against inflation usually doesn’t bode as well as its long-term alternative. Your investment needs time to mature, and purchasing CRE when it’s too late will not protect your portfolio in the same way.

This is largely due to the rising costs of goods, services and labor that come with inflation, most especially when it rapidly accelerates. By the time you start considering putting some cash in CRE in an inflated economy, not only will it be more expensive, it’s usually too late.

Instead, you should approach investing in CRE as a long-term hedge. As we get out of these inflationary times, now is a good time, as soon as you’re able to, to look into investment strategies and talk to the right professionals to help you get started; the last thing you want to do is wait too long.

Selecting The Best Property Type

Selecting the best commercial property types as a hedge is where market specifics really come into account. Take the Covid-19 pandemic, for example; the virus put many retail outlets out of business but led to a flaming hot housing market. Those invested in retail felt the aftershocks of the pandemic as retail values plummeted, while those invested in multifamily and industrial real estate saw quite the opposite.

This is extraordinarily important information to keep in mind moving forward into a post-pandemic economy. The retail market has forever changed, and while consumers still enjoy shopping in person, there is no denying the cold lessons the pandemic taught us about e-commerce. In the end, do your research and stay diligent when investing in CRE.


Source: Forbes