Commercial Real Estate Chartbook
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Sturdy Growth and Lower Rates Should Help the CRE Market Find Secure Footing
High interest rates continue to loom large over the commercial real estate market. Although the year began with optimism that easier monetary policy would be in the not-too-distant future, the start of the Federal Reserve’s rate cutting cycle seemingly has been delayed by a flare up in inflation. After moderating significantly over the past 18 months, the core PCE deflator, which is the Federal Reserve’s preferred measure of inflation, accelerated to 3.7% annualized over the first quarter of 2024.
While the recent bump in inflation is certainly concerning, we have not changed our view that the FOMC will reduce the federal funds target rate later this year as price pressures return to a cooling trend. Supply chains continue to function more-or-less normally, which means goods prices should remain contained. Food prices do not appear to accelerating, while lower oil prices point to energy cost disinflation in the months ahead. Service sector prices remain somewhat problematic, but more moderate economic growth and a softer labor market should help relieve some of that pressure.
All told, a return to easing inflation in the second half of the year still seems probable, which should allow the Federal Reserve to initiate a rate cutting cycle this fall. Our current base case forecast is for the FOMC to lower the federal funds target rate by 25 bps at both its September and December meetings, with an additional 100 bps in reductions throughout 2025.