Market Overview

The U.S. commercial real estate market in Q3 2023 saw investment volumes continue to decline, with a 54% year-over-year drop to $82 billion. Multifamily remained the most favored sector, albeit with a significant decrease in transaction volume to $29 billion, followed by industrial & logistics at $20 billion and retail at $15 billion. Los Angeles and New York continued to lead in market volume, though both saw considerable yearly decreases.

Cross-border investment decreased by 55% year-over-year to $3.4 billion, impacted by a strong U.S. dollar and rising interest rates. In terms of property prices, the RCA Commercial Property Price Index fell by 9% year-over-year, with multifamily prices decreasing the most at 13%, followed by office at 9% and retail at 7%.

Delinquency rates for commercial mortgage-backed securities (CMBS) rose to 4.40% in Q3, up by 30 basis points quarter-over-quarter. The NCREIF Property Index reported negative returns, with the office sector experiencing the most significant decrease at negative 17.1% annualized. Despite these challenges, private investors were net buyers, accounting for $51 billion or 62% of the total investment volume.

In the lending environment, the CBRE Lending Momentum Index indicated a slowdown in acquisition activity, falling by 3.0% quarter-over-quarter and 47.9% year-over-year. However, the rate of decline in Q3 suggests that lending activity may be nearing its trough. Loan spreads tightened for both commercial and multifamily loans, and banks remained the top non-agency lenders, followed by life insurance companies and alternative lenders. Multifamily agency lending increased to $29.8 billion in Q3, with a notable rise in mortgage rates. Loan-to-value ratios edged up for both commercial and multifamily loans. Loan constants and underwritten cap rates increased, indicating a cautious lending environment amidst economic uncertainties.

The commercial real estate market’s performance reflects the broader economic headwinds and a cautious approach from investors. High-interest rates and economic uncertainty continued to suppress investment activity, with particularly sharp declines in entity-level transactions and specific segments such as office properties. Despite these challenges, the commercial real estate market’s fundamentals are strong, supported by private investors’ continued interest and the resilience of key sectors like multifamily and retail. The sector’s future will depend on evolving market conditions, including interest rate trajectories and economic policies.

U.S. Commercial Real Estate Investment Volume by Quarter ⇩

U.S. Commercial Real Estate Investment Volume by Sector ⇩

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters) ⇩
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

U.S. Real Estate – Multifamily Market

In Q3 2023, the multifamily sector showed signs of moderation amid economic headwinds. Demand remained robust, with net absorption of 82,100 units, reflecting a rebound in seasonal demand. The overall vacancy rate nudged up to 5.1%, a slight increase reflective of high supply with 114,600 new completions. While this uptick in vacancy is a departure from the historical long-term average, the increase is equal to that of Q2 but less than that of Q1, suggesting a stabilization of supply-demand dynamics. Year-over-year rent growth decelerated to 0.7%, indicating a shift towards normalization of growth rates.

The investment volume for multifamily decreased by 8.5% quarter-over-quarter to $29.0 billion, maintaining its position as the dominant sector in commercial real estate investment. Despite the drop in investment volume, the sector has shown resilience with a 34% share of the total CRE investment volume, though well below the $75.8 billion from a year ago.

The market’s adaptability is evident, with multifamily investment still robust in the face of rising cap rates and interest rates. The prime multifamily going-in cap rate has increased by 155 basis points since Q1 2022, now standing at 4.92%. CBRE anticipates a slight potential increase in cap rates if the Federal Reserve’s interest rates continue to climb.

The market’s future will hinge on economic conditions and the Federal Reserve’s policy trajectory. However, the multifamily sector’s fundamentals remain strong, with a stabilization expected once the rate-hiking cycle concludes. The quarter’s data reflect a market in transition, adjusting to the post-pandemic landscape and shifting economic forces.

U.S. Multifamily Vacancy Rate and QoQ % Change ⇩

U.S. Multifamily Vacancy Rate by Class ⇩

U.S. Multifamily Monthly Rent and YoY % Change ⇩

U.S. Real Estate – Commercial Retail Market

The commercial retail market in Q3 2023 witnessed an increase in demand, with net absorption rising by 34% quarter-over-quarter to 9.8 million square feet, showcasing the sector’s recovery. However, total net absorption was only 52% of the 10-year quarterly average, indicating a market still stabilizing from pandemic impacts.

The overall retail availability rate decreased to 4.8%, the lowest level since 2005, with significant declines in the neighborhood, community, and strip center segments. Despite a challenging environment marked by store closures in the power center segment, leading markets like Orlando, Phoenix, Los Angeles, New York City, and Long Island saw robust absorption.

Construction completions in Q3 dropped to 5.6 million square feet, a 28% quarter-over-quarter decrease, continuing the trend of reduced new development due to high costs and tight lending conditions. Rent growth moderated, with asking rent growth falling to just over 2.1% year-over-year and quarter-over quarter growth falling below the long-term average, signaling a cautious outlook from landlords amid an economic slowdown.

U.S. Retail Construction Completions ⇩

U.S. Retail Vacancy Rate by Property Type ⇩

U.S. Retail Asking Rent and Y-o-Y% Change ⇩

Data Sources: U.S. Census Bureau, U.S. Chamber of Commerce, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, CBRE Research, CBRE Econometric Advisors, Bloomberg, Reuters, Schroders, WSJ.com, Zillow Group, Redfin, S&P Global, CNN Business, CBS News, World Economic Forum, The Conference Board & Deloitte Insights

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Attn:     Client Relations
Email:   Info@grandway.com
Tel:        +1 626-357-1200

U.S. Economy

The U.S. economy displayed remarkable performance in Q3 2023, with real GDP growing at an annual rate of 4.9%, invigorated by robust household consumption and a stronger buildup in private inventories. The Commerce Department’s Bureau of Economic Analysis highlighted this as the fastest pace of growth in nearly two years, signaling an economy that continues to defy recessionary fears. The increase in consumer spending was particularly notable, jumping to a 4.0% rate from a modest 0.8% in Q2, a clear testament to the resilience of the American consumer amidst various economic headwinds.

The acceleration in residential investment also played a critical role in this economic expansion, marking a rebound after contracting for nine consecutive quarters. This turnaround was indicative of the housing market’s recovery, likely fueled by continued under-supply and a persistent demand for housing. Despite these strong indicators, there is a potential risk factor in the form of the declining saving rate, which dipped to 3.8% from 5.2% in the preceding quarter. This suggests that some consumer spending may be drawing on savings, reflecting a possible shift towards a reliance on credit.

Moreover, the economic buoyancy was complemented by government spending, which picked up significantly in Q3. However, the business investment component sent mixed signals, with a slight dip observed for the first time in two years. This decline in business outlays, especially in equipment spending and a slowdown in construction investment related to semiconductor manufacturing, may signal caution in the business sector about the longevity of the current economic growth pace.

Federal Reserve, Inflation, and Employment

The Federal Reserve’s stance in Q3 was one of careful management, as it continued to steer the economy through a period of inflationary pressure that has begun to show signs of abatement. The core inflation rate, which excludes volatile food and energy prices, was stable. The average monthly inflation rate, as measured by the CPI, was 0.4 percent in the third quarter, up from 0.2 percent during the second quarter. This moderation in inflation is a positive sign that the aggressive interest rate hikes by the Federal Reserve may be achieving their intended effect without unduly hampering economic growth.

In the labor market, robust job creation was a highlight for the quarter, with an average of 266,000 jobs added per month, surpassing the rates necessary to keep up with population growth and maintain a stable unemployment rate. This strong labor demand reflects the economy’s resilience. The unemployment rate increased modestly to 3.8% in Q3, possibly attributed to increased labor force participation, with more individuals now actively seeking work. This is corroborated by the fact that the labor force participation rate and the prime-age participation rate are at post-pandemic highs, suggesting a labor market that remains fundamentally healthy.

Despite the above, the Federal Reserve continues to signal caution, with policymakers indicating the likelihood of further rate hikes. The Fed’s revised forecast for interest rates shows a higher average rate during 2024, suggesting a sustained period of tighter monetary policy. The challenge for the Fed is to manage these rate increases in a way that controls inflation without precipitating a significant slowdown in economic activity. The balance of indicators suggests that while the economy is robust, the Fed is preparing for a more subdued pace of growth in the quarters ahead.

U.S. Stock Market

During Q3 2023, the U.S. stock market reflected the broader global trend, with equities posting negative returns, signaling a shift in investor sentiment. After the optimism of the first half of the year, investors reevaluated their positions in light of the Federal Reserve’s revised projections for a prolonged period of higher interest rates. This shift was evident from the decline in the U.S. composite flash purchasing manager’s index (PMI) to 50.1, barely indicating expansion. The “Magnificent Seven” tech giants, which include Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, and Meta, suffered declines, significantly impacting the market. Energy stocks, however, showed resilience, benefiting from higher oil prices due to production cuts.

The quarter was challenging for investors as the anticipation of a “soft landing” orchestrated by the Fed gave way to concerns over the sustainability of growth amidst policy tightening. Despite the downturn in equities, the labor market’s enduring strength and a cooling inflation rate provided some underlying support to the market. Looking ahead, the strategic positioning will be crucial as the market adjusts to a new phase of economic conditions and monetary policy.

Data Sources: U.S. Census Bureau, U.S. Chamber of Commerce, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, CBRE Research, CBRE Econometric Advisors, Bloomberg, Reuters, Schroders, WSJ.com, Zillow Group, Redfin, S&P Global, CNN Business, CBS News, World Economic Forum, The Conference Board & Deloitte Insights

For additional information, please contact:
Grandway Group
Attn:     Client Relations
Email:   Info@grandway.com
Tel:        +1 626-357-1200

Market Overview

In the second quarter of 2023, the U.S. commercial real estate market saw mixed performance, as different sectors faced varying degrees of challenges and opportunities amid the ongoing economic recovery. The multifamily sector showed resilience and stability, while the office sector continued to struggle with weak demand and high vacancies. Retail saw signs of improvement but faced structural changes and uncertainties.

Multifamily vacancy remained flat at 5%, and rent growth has come back down to pre-pandemic levels. Office vacancies remained high at 18.9% nationwide, and asking/effective rent stayed in the $35/$28 per sq. ft. range. Retail vacancies declined to 10.2%, and asking/effective rent remained in the $21/$18-persqft range.

U.S. commercial real estate investment volume fell 64% year-over-year in Q2 to $75 billion. Multifamily continued to be the preferred sector with $27 billion in transaction volume, followed by industrial and logistics with $21 billion. Los Angeles remained the most favored investment market on a trailing-four-quarter basis, with $43 billion in transaction volume, followed by New York with $37 billion.

Q2 saw more buying activity from private and foreign investors, while REITs and institutions sold more properties than they bought. The amount of investment capital coming from overseas investors was down to $4.9 billion, dropping by nearly 50% from Q2 last year, due to economic uncertainty and the strength of the U.S. dollar.

The commercial real estate market in Q2 reflected the uneven and uncertain nature of the economic recovery. It was also influenced by various factors, such as monetary policy, inflation, labor market conditions, consumer behavior, migration patterns, and technological innovation.

U.S. Commercial Real Estate Investment Volume by Quarter ⇩

U.S. Commercial Real Estate Investment Volume by Sector ⇩

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters) ⇩
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

Multifamily Market

The multifamily market improved in the second quarter, buoyed by increased demand and moderate rent growth. But the sector still faced some challenges with oversupply in the short-term and reduced investor interest in general.

Demand increased moderately as more people rented apartments in Q2 because economic conditions improved and household formation increased. However, at the same time, short-term supply was very high in Q2, as new buildings delivered a record 351,500 units in the last four quarters. This was mainly a result of the strong pipeline of new development projects that started before or around the beginning of the pandemic, which were completed in the past four quarters. Construction starts have decreased in recent quarters, which is expected to reduce new supply in 2024 and later.

The vacancy rate for multifamily units increased slightly to 5.0% in Q2, which is closer to the historical longterm average, suggesting that supply and demand are starting to balance out. However, different markets had vastly different vacancy rates, with some major cities having high vacancies and some smaller markets having low vacancies.

Rent growth in Q2 appeared to be normalizing and approaching the pre-pandemic long-term growth rate. The average monthly rent for multifamily units increased slightly by 1.1% in Q2 to a record high of $2,164 since 2005 (start date of our data set). On a year-over-year basis, the average monthly rent increased by 2.6%, similar to the pre-pandemic five-year average of 2.7% per year.

The investment volume for multifamily in Q2 increased 2.7% from Q1 to $27.5 billion, which is still much lower than the $95.6 billion volume seen in Q2 2022. This was the lowest Q2 volume since 2014, except for Q2 2020 because of the pandemic. It was also 27% lower than the quarterly average from 2013 to 2019. The low transaction volume was mainly the result of economic uncertainties and limited credit availability, which made acquisitions difficult. Investors were careful and picky, preferring high-quality assets in strong markets.

We expect the industry to continue to be impacted by economic uncertainty and shortage of credit, but it is a resilient industry that is unlikely to collapse.

U.S. Multifamily Vacancy Rate and QoQ % Change ⇩

U.S. Multifamily Vacancy Rate by Class ⇩

U.S. Multifamily Monthly Rent and YoY % Change ⇩

Commercial Retail Market

Retail vacancies fell slightly by 0.10% to a record low of 4.8% in Q2 2023, driven by the strong performance of neighborhood retail and strip centers as well as the growth in demand in suburban regions.

Asking rents increased to $23.21 per sq. ft., an average year-over-year increase of 2.1%, marking the largest quarterly increase since Q1 2022.

On the other hand, net absorption of U.S. retail recorded 5.9 million sq. ft., the lowest level of demand since Q3 2020, when absorption was negative at the height of the pandemic. Elevated construction costs and economic headwinds also kept construction completions at historically low levels.

U.S. Retail Construction Completions ⇩

U.S. Retail Vacancy Rate by Property Type ⇩

U.S. Retail Asking Rent and Y-o-Y% Change ⇩

Data Sources: CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, Bloomberg, WSJ.com, Zillow Group, Redfin, CNN Business, CNBC, CBS News, S&P Global, The Conference Board, Deloitte Insights, Nasdaq, Bureau of Labor Statistics, U.S. Census Bureau, U.S. Chamber of Commerce, World Economic Forum, Federal Reserve Bank of St. Louis & Federal Reserve Bank of Atlanta

For additional information, please contact:
Grandway Group
Email:   Info@grandway.com
Tel:        +1 626-357-1200

U.S. Economy

In the second quarter of 2023, the U.S. economy did not show much evidence of a downturn, as the growth rate GDP turned out higher than anticipated according to the latest data from the Commerce Department. U.S. GDP increased at a 2.4% annualized rate in Q2, versus 2.0% in Q1.

The strong GDP growth was driven by robust consumer spending, which increased by 1.6% and accounted for 68% of all economic activity during the quarter. The solid job market and high consumer confidence supported consumer spending.

Other positive contributors to GDP growth were nonresidential fixed investment, government spending, and inventory growth. Nonresidential fixed investment reflected a rebound in business spending on equipment and software and increased intellectual property products. Government spending was boosted by federal nondefense spending and state and local spending.

One looming concern over economic growth is the housing market which slowed down noticeably due to high prices and high mortgage rates. However, home prices are showing signs of a rebound due to the lack of supply.

Federal Reserve, Inflation, and Employment

Crucially, inflation was held in check through the second quarter of 2023. Inflation, as measured by the personal consumption expenditures (PCE) price index, increased by 2.6%, down from a 4.1% rise in the first quarter and well below the Dow Jones estimate of 3.2%. This suggests that inflationary pressures have eased in the second quarter, despite the strong consumer demand and economic growth.

The Federal Reserve has been raising interest rates gradually since 2020, aiming to keep inflation near its 2% target and prevent the economy from overheating. The Fed has hiked rates 11 times since March 2022, with the most recent hike bringing the Fed’s key borrowing rate to 5.25 – 5.50%, its highest level in more than two decades. Markets expect itto be the last hike of this tightening cycle, though the Fed has not made an official decision.

The labor market has also remained resilient in the Q2, as the unemployment rate in June remained at 3.6%, the same level as last year. The total nonfarm payroll employment increased by 209,000 in June, and wage growth also picked up, rising by 5.7% year-over-year.

Overall, the second quarter GDP report shows that the U.S. economy is healthy, with solid growth, low inflation, and a robust labor market. The Fed’s monetary policy stance appears appropriate for the current economic conditions, balancing the risks of inflation and recession. The outlook for the rest of the year remains positive, barring any major shocks or disruptions from trade tensions or geopolitical events.

U.S. Stock Market

The U.S. stock market rose in Q2, mainly due to its strong performance in June. Investors seemed less worried about inflation and more confident about the U.S. economy’s ability to cope with higher interest rates. The best-performing sector in the quarter was information technology, driven by excitement over AI and its related industries, especially chipmakers. Other sectors that outperformed were consumer discretionary and communication services. Energy and utilities lagged behind the rest of the market.

Data Sources: CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, Bloomberg, WSJ.com, Zillow Group, Redfin, CNN Business, CNBC, CBS News, S&P Global, The Conference Board, Deloitte Insights, Nasdaq, Bureau of Labor Statistics, U.S. Census Bureau, U.S. Chamber of Commerce, World Economic Forum, Federal Reserve Bank of St. Louis & Federal Reserve Bank of Atlanta

For additional information, please contact:
Grandway Group
Email:   Info@grandway.com
Tel:        +1 626-357-1200

Market Overview

The U.S. real estate market is facing a challenging year in 2023, as high-interest rates and a recession continued to weigh on asset values and fundamentals. According to CBRE, weakening fundamentals and higher cost of capital will generally lower asset values by an average of 10% across all sectors. In Q1, commercial real estate investment volume for the trailing 12 months fell 33% to $594 billion. Institutional and private investors were net buyers, while REITs and foreign investors were net sellers. Multifamily remained the leading sector with $25 billion in Q1 transaction volume, followed by industrial and logistics with $17 billion.

U.S. Commercial Real Estate Investment Volume by Quarter

U.S. Commercial Real Estate Investment Volume by Sector
(USD Billions)

In Q1 2023, Greater Los Angeles continued to be the preferred market for real estate investment, with a total investment volume of $51 billion, followed by New York with $42 billion and Dallas with $31 billion. Of the top 20 markets, Nashville had the smallest decline in transaction volume at 13%.

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters)
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

Cap rates expanded by approximately 125 to 150 basis points (bps) across all property types since early 2022, translating to a 15% to 22% decline in values based on actual transactions.

Historical Cap Rate and Forecast Across Sectors

Due to their strong fundamentals and positive long-term demand outlook, multifamily and industrial properties remained the most favored by investors. Grocery-anchored retail centers also performed well, while office investors preferred high-end Class A buildings.

After facing unprecedented challenges and spikes in costs over the past two years due to materials, labor, and margins, construction costs may moderate in 2023 as materials costs likely won’t rise. However, labor costs and margins likely will increase. Construction spending is expected to remain strong next year, driven by the record-high value of construction starts in 2022 and the $500 billion infrastructure program. Activity may slow down later in 2023 due to rising interest rates and economic slowdown, especially in the residential sector.

Annualized Construction Starts by Property Type

Commercial real estate will face a tough year in 2023 due to high-interest rates and possible recession. However, businesses are financially healthy and are expected to avoid laying off workers in a competitive labor market. Consumers are cautious but have fairly strong balance sheets with lower debt levels compared to previous recessions. These factors imply a moderate slowdown, with unemployment likely staying below 6%. Inflation is expected to fall by the second half of 2023, paving the way for lower interest rates and a new cycle that may last until the 2030s.

The real estate sector will still face rapid changes despite the economic challenges. Some buyers will be discouraged by higher capital costs, but large equity players who can invest capital fast will have opportunities. However, these investors will have a limited window: after the Great Recession, the pricing low point only lasted about six to nine months before cap rates started to shrink. The window of opportunity may be even smaller this time, as the recession is expected to be relatively short. ESG issues and the digital economy will also shape real estate demand. Hybrid work will benefit both employers and employees, but it will require adaptation from office owners and occupiers. Cities will also have to cope with new commuting habits and lower office demand.

The outlook for different sectors will vary, with data centers and industrial real estate likely to be the most resilient, followed by multifamily and retail. The office and hospitality sectors are expected to face more headwinds, and the life sciences sector should see a slowdown in activity after a COVID-induced boom. All sectors and locations will have to comply with decarbonization mandates from governments, occupiers, and investors.

Multifamily Market

Multifamily fundamentals weakened in Q1 2023 due to slow leasing, new deliveries, rising vacancies, and plateauing rents. Investment volume totaled $24.7B, a 63.7% year-over-year decrease and 25% less than the 2013-to-2019 average. Supply pressures are high but manageable, while construction debt is scarce and expensive, slowing down new starts.

Demand in the multifamily sector is expected to lag supply in the near term due to economic uncertainty, pushing vacancy toward 5%. 57 markets had vacancy rates exceeding 4.0%, up from 52 in Q4 and 43 in Q3 of 2022.

U.S. Multifamily Vacancy Rate and QoQ % Change

While the increase in vacancy rates extended across all multifamily classes, class A vacancies increased at a lower rate than class B and class C assets, which suggests that renters are not giving up their standard or living or moving to lower-cost housing despite the economic uncertainty. All three asset classes witnessed a deceleration in vacancy rate increases.

U.S. Multifamily Vacancy Rate by Class

Average monthly nationwide rent increased by 4.5% on a year-over-year basis. While this is down from the record 15.3% increase in Q1 2022, it is still well above the pre-pandemic average of 2.7%.

U.S. Multifamily Monthly Rent and YoY % Change

Multifamily rental demand continued to be high because of the difficult for-sale market, where home prices remain high and mortgage rates soared.  According to CBRE, the average monthly payment for a new home in Q3 2022 was 57% more than the average rent, the biggest difference ever recorded.  In comparison, the gap was only 8.5% before the pandemic.  The current large gap suggests that renting will remain more affordable than buying and owning, even if home prices and mortgage rates go down next year.

U.S. Multifamily Cost of Ownership vs. Cost of Renting

Multifamily sector has demonstrated solid fundamentals and an average annual total return of 9.3% over the past decade. It also has access to Fannie Mae and Freddie Mac, which are unavailable to other sectors. These factors make multifamily one of the best asset classes to hedge against inflation. As the market stabilizes, more investors and lenders are expected to capitalize on this opportunity in 2023.

Commercial Retail Market

Commercial retail saw rents increase and vacancies fall across all retail sectors in Q1 2023. Vacancy rate fell to 4.8% in Q1 2023, a record low since CBRE began tracking the market in 2005. Rent growth fell by 50 bps year-over-year to 2.0% but remained above the 10-year average of 1.7%.

U.S. Retail Vacancy Rate by Property Type

Average asking rent grew by about 2.0% in Q1 2023 from the same period in 2022 but remained above the 10-year average of 1.7%. Neighborhood, community & strip centers continued to be the strongest performers, with rent growth of 2.7% over the prior year, while lifestyle & mall, and power center rents were unchanged.

U.S. Retail Average Asking Rent

In Q1, total retail sales dropped to 5.4%. Core retail sales, which exclude nonstore retail sales, increased by 0.5% from the previous quarter to 7.7%. Nonstore retail sales, which include e-commerce, decreased by 1.2% from the last quarter to 9.8%. Both core and nonstore retail sales grew slower than a year ago, by 3.5% and 0.6%, respectively.

U.S. Consumer Retail Sales Growth and YoY% Change

U.S. Retail Sales by Category

Q1 saw muted retail space deliveries for the quarter at 5.1 million SF, with a rolling 12-month total of 26.7 million SF, the second lowest on record behind only 2022. This trend of diminished development is expected to continue, with retail construction starts for the quarter totaling 4.8 million SF.

Retail fundamentals remain strong in 2023, thanks to limited new supply and positive net absorption. Retail deliveries have hit record lows for three consecutive years, while demand for retail space has outpaced supply. As a result, rents have increased, and vacancies have decreased across most retail subtypes. Moreover, more than 50 million SF of retail space has been repurposed since 2003, with 10 million SF in the last five years alone. This trend is expected to continue in 2023 as owners of underperforming malls and centers transform their properties into mixed-use developments.

Despite the challenges of high inflation, rising interest rates, and labor shortages, retail fundamentals are expected to stay solid in 2023 as brick-and-mortar retail sales keep growing from the previous year and as the high construction costs and the limited supply of retail space continue to persist.

Data Sources： CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, CoStar Realty Information Inc., Bloomberg, WSJ.com, Zillow Group, Redfin, Bureau of Labor Statistics, & U.S. Census Bureau

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Grandway Group
Email:   Info@grandway.com
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U.S. Economy

The U.S. economy showed signs of resilience in the first quarter of 2023, despite the collapse of Silicon Valley Bank and the turmoil in the banking sector. According to the Atlanta Fed, real GDP is estimated to have grown at a seasonally adjusted annual rate of 1.1% in Q1 as of April 26, lower than the 2.5% projected on April 18. Consumer spending, business investment, and net exports contributed positively, while government spending and inventories dragged on growth. The outlook for the rest of the year remains uncertain, as inflation pressures, interest rate hikes, and political risks could weigh on economic activity.

Signs persist that the U.S. economy will likely fall into a mild recession in 2023. The Federal Reserve continues to raise interest rates to combat inflation, affecting growth. At the same time, the tech and finance sectors, which have been driving economic growth in recent years, are showing signs of weakness with layoffs and losses resulting from changing market conditions and regulatory pressures. The labor market remains tight but is showing signs of losing momentum. Employment is expected to moderate over the coming quarters before rebounding in early 2024.

Federal Reserve, Inflation, and Employment

The May CPI report marked the smallest year-over-year increase in inflation since April 2021, with headline CPI rising by 0.4% month-over-month and 4.9% year-over-year. The index rose due to higher costs of shelter, gas, and used cars, but lower prices for fuel, new vehicles, and groceries helped to counter-balance. Overall, headline CPI is expected to fall below 4.0% year-over-year. After raising rates in May, the Fed stopped signaling more rate hikes and said it would make decisions based on incoming data.

Labor markets remained tight but show signs of moderating. The April 2023 labor force participation rate was 0.7 percentage points below the rate in February 2020. Nonfarm payroll employment rose by 253,000, while the unemployment rate changed little at 3.4%.

At its May meeting, the FOMC hiked rates by 0.25% to 5.00%-5.25%. The Fed removed an indication that future increases are warranted and instead shifted to a language indicating that decisions will be based on incoming data. Analysts expect the Federal Reserve to hold interest rates steady at 5.25-5.50%. These data suggest we are on track for the tightening cycle to likely end in 2023.

U.S. Stock Market

The U.S. stock market was mixed and volatile in Q1 2023, with large-cap growth and defensive sectors outperforming small-cap and cyclical sectors. In the past three months, the S&P 500 Q1 EPS forecast has dropped from $54.05 to $50.63 per share, leading analysts to lower their year-over-year growth projections by 6.4% before the earnings season. One of the primary drivers behind the earnings decline continued to be shrinking margins. As inflation slowed, companies had a more challenging time passing along cost increases to consumers. This reduced their profit margins, which were at record highs in 2021 through 2022.

The debt market experienced a sharp fall in yields due to the stresses in the banking sector and the Fed’s dovish shift.  The energy market saw a rebound in crude oil prices after OPEC and its affiliates announced production cuts, while the precious metals market benefited from a weaker dollar and safe-haven demand.

Data Sources： CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, CoStar Realty Information Inc., Bloomberg, WSJ.com, Zillow Group, Redfin, Bureau of Labor Statistics, & U.S. Census Bureau

For additional information, please contact:
Grandway Group
Email:   Info@grandway.com
Tel:        +1 626-357-1200