United States economic outlook

Activity

The US economy looks likely to avoid recession. Activity has been remarkably resilient in the face of high interest rates, strong consumer and corporate balance sheets, positive supply shocks, and looser fiscal policy. These tailwinds are likely to fade in 2024, so we think growth will moderate to a below-trend 1.1% annualised for much of this year. Indeed, consumer spending is slowing already. But easing financial conditions should prevent a more disruptive drop-off in activity. This should set the scene for a reacceleration of activity in 2025 towards trend-like growth.

Inflation

Personal consumption expenditure (PCE) and consumer price index inflation were hot in January, raising fears that the last stage of inflation may prove difficult. In part, this reflected seasonal distortions; but services inflation is running hot, and price growth is often more persistent in these components. Falling goods prices should partly mask this stickiness and services inflation should gradually slow, given weaker shelter price growth (housing costs) and moderating wages. We forecast core PCE inflation to fall to 2.5% year on year, by the summer. But progress might stall during the rest of the year as base effects prove less beneficial. 

Policy

The Federal Reserve (Fed) played down recent inflation upsets at its March meeting, arguing that these bumps didn’t change the disinflation story. These signals leave the door open for a cut in June, assuming no further nasty inflation surprises in the coming months. Thereafter, we expect three further 25 basis-point (bp) cuts this year. This is more than indicated by the Fed and is based on our forecasts for slower growth. Indeed, rates are expected to fall more than the Fed and the market are forecasting in 2025 and 2026. In part, this reflects our view that equilibrium interest rates remain low.  

United States economic outlook

Source: abrdn March 2024
Forecasts are a guide only and actual outcomes could be significantly different.

North American real estate market overview 

We expect prices to fall as much as 6% in the weaker multifamily markets. However, new developments have dramatically reduced and, given the long construction lead times, we could see a strong recovery as early as the end of 2025.

Prices should remain flat in industrials. New federal grants amounting to $3.3 billion have also kick-started infrastructure improvements to road networks along the Midwest, the East Coast, and the Gulf-Coast states. This should prove to be an additional tailwind for the industrial and logistics sector.

Office prices are close to stabilisation, although we still expect prices to fall 7-10% this year. We then expect an extremely wide bifurcation in performance between better assets and secondary assets.

In the retail sector, weak supply numbers for strip retail are creating some positivity and unemployment numbers remain low. But dwindling savings and higher credit card debt remain a threat to spending.

North American real estate market trends

Offices

The AON Centre in Los Angeles sold last year for 45% less than its last valuation price. More recently, 777 South Figueroa Street in Los Angeles has now changed hands for 60% less than the 2018 valuation. Brookfield is cooperating with its lender, a syndicate led by Wells Fargo, on the sale.

With restricted lending and an estimated $72.7 billion refinancing shortfall expected between now and 2025, we expect only pockets of short-sale transactions. This share of transactions will probably be dominated by the weaker markets, such as downtown Los Angeles. We think that the office markets are probably close to stabilisation, but the recovery will look different from previous ones. 

While previous recoveries in US offices were v-shaped, this cycle will not play out the same way. Working from home is a long-term headwind for office demand. There will also be a widening bifurcation between newly (re)developed and well-amenitised class A/trophy assets, and older properties with fewer amenities.

Industrials and logistics 

Rental growth for industrials will be weighed down by completions in big-box properties this year. Smaller properties of around 100,000 square feet or less are likely to be sought after, with strong single-digit rental growth. 

That said, there are some exceptions when looking at bigger industrial properties in certain sub-markets. For instance, markets within a 15-minute drive from Port Houston have benefited from the shift from the West Coast to the East Coast and Gulf-Coast ports. There are just over 80 existing industrial properties that are larger than 100,000 square feet within a 15-minute rush-hour drive of Houston’s Bayport Container Terminal. But only one property is available for lease. 

However, the limited space available for immediate occupancy should benefit the industrial development node in Baytown, Texas. This is just a bridge crossing away from the terminal.

More infrastructure support for ground freight should boost demand for markets with intermodal terminals – particularly those that sit in the path of newly formed freight rail lines and newly conceived trade corridors around the land borders. Despite the labour negotiations happening around the East Coast and Gulf-Coast ports in September, we think the long-term trend of reshoring away from China would be best served by the East-Coast ports.

Retail

While retail and food sales (excluding vehicles and fuel) increased around 5% in 2023, retail sales have declined by 0.8% so far in 2024. Dwindling savings and rising credit card debt also pose headwinds for consumer spending. But unemployment, which is probably the most direct threat to personal consumption, remains historically low and supports a cautiously optimistic outlook.

Strip centres have recovered from the pandemic-related trough of 2021. The recovery for small shops has been notably stronger than for anchor stores. Occupancy rates for small shops are now higher than for anchor stores. New strip centre deliveries are also expected to remain muted in the foreseeable future because of higher construction costs. 

With little new supply and tenants competing for the limited options, landlords should retain pricing power this year for strip centres. Returns should remain resilient for the next three years. 

Multifamily

Multifamily is likely to face headwinds as capital values will remain challenged. Oversupply, particularly in the Sunbelt, will put pressure on rental growth up to 2025.

Over the past nine years, though, construction lead times for multifamily have increased from 18 months to two years. Insufficient construction debt, delayed planning permission, and increasing costs for materials have diminished the number of multifamily units being started.

Demand for the East-Coast hubs is expected to remain strong. With high barriers to homeownership and limited supply, vacancy rates for the East-Coast markets should stay tight.

However, the Sunbelt will probably continue to struggle with rental growth as supply pressures mount. But on the bright side, the rental correction in the Sunbelt could promote in-migration. This has already turned rental growth slightly more positive in Phoenix during the first two months of the year. 

While multifamily might struggle during 2024 to mid-2025, a delayed supply response, because of construction lead times, could mean rental growth accelerates as we head into 2026.

Outlook for risk and performance

We are bearish on US offices, as occupiers struggle to get employees back into the office. Weekly physical occupancy seems to have plateaued at around 50% nationally. Effective rental growth will be weak as the availability of sub-leases forces landlords to entice occupiers with increasingly large concessions. While short-sale transactions have become more prominent, we think the market is near to stabilising. That said, the shape of the recovery will be drastically different from previous cycles. The bifurcation between class A/trophy assets and secondary properties will widen.

We prefer established East-Coast population hubs in the multifamily sector. Despite the large national volume of deliveries, supply in the East Coast is expected to remain limited. Multifamily assets in Washington DC could also perform well, given strong rental demand amid the uncertain political background. Pockets of forced sales may become more prominent for the Sunbelt and even the East-Coast markets. This is more likely for properties that were financed during 2020-2022 by small multifamily syndicators. These assets could provide attractive buying opportunities. 

We like strip retail, lifestyle centres and standalone retail, particularly grocery or discount-store-anchored properties in the Sunbelt, Midwest, and the East Coast. These areas should benefit from higher population growth and a limited supply pipeline but may face headwinds if economic conditions severely deteriorate.

We are bullish about industrial and logistics markets surrounding the Gulf and East-Coast ports. We think these ports should be primed to capture more shipping volumes as friendshoring becomes more prominent. Recent infrastructure upgrades to the ports of Savannah and New Jersey, and to road networks on the East and Gulf Coast, should allow more logistics demand to flow through the regions. Land border traffic is expected to grow because of nearshoring, which is expected to boost markets with established intermodal terminals, such as Chicago and Dallas.