US CRE Market Insights December 2022

Forecasters are unanimous in expecting a very weak if not recessionary US economic performance in 2023 as a response to the sharp increase in interest rates launched by the US Federal Reserve (Fed) in 2022. Expectations for a soft landing or mild recession stem from indications that the economy was already slowing at year-end 2022 and that it will slow further as the lagged impact of higher interest rates bite.1

 

These forecasts assume that the Fed will avoid over-tightening that could turn a soft landing or mild recession into a more severe downturn. For US commercial real estate (CRE) performance in 2023, the important point is the degree of weakening in the demand for space. In 2022, CRE pricing already showed the impact from higher interest rates though the response was muted. Cap rates on completed transactions widened very little but the pace of transactions slowed sharply. We believe fundamentals including new supply, absorption, vacancy rates, and rent changes in 2023 will depend on the degree of economic weakening and they will differ across property sectors and metro markets partly reflecting the differing conditions at year-end 2022.

 

1Wolters Kluwer. Blue Chip Economic Indicators. December 9, 2022

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