Real Estate Newsletter 3.25.24
Weekly News Roundup
- Interest Rate Forecast
- Commercial Real Estate Overview
- Big News for Realtor Commission Structures
Interest Rate Forecast
Market expectations for a June rate cut spiked on Wednesday following the Federal Reserve’s decision to hold interest rates steady and its nod to three rate cuts still in the cards for 2024. Federal Open Market Committee members voted unanimously to keep rates within the 5.25%-5.5% range.
The Fed’s dot plot indicated that policymakers still anticipate three 25-basis-point rate cuts in 2024, though the median forecast for the benchmark rate climbed from 3.6% to 3.9%. The Fed also anticipates three rate cuts in 2025. After the announcement, CME’s FedWatch Tool showed traders’ expectations for a cut in June ramped up to nearly 70% from 55% earlier in the day before the decision.
Mortgage rates peaked in October 2023 at about 8%, followed by a steady decline. And after a brief jump in February, they seem to be settling back to where they were at the beginning of 2024, when a 30-year fixed rate mortgage was about 6.6%. Some forecasters predict mortgage rates could fall to around 6.0% by year end. Source: Business Insider
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Commercial Real Estate Overview
Retail
Optimism is brewing for retail, where just a few years ago the general sentiment was that brick-and-mortar retail would become totally outmoded. National performance is still muted for the sector, but asking and effective rents have increased. This, along with a flat vacancy rate for over a year, shows that retail is dealing well in the omnichannel environment, which many didn’t expect. Momentum is building for the sector, and experts feel particularly strongly about modern developments or well renovated developments with proximity to housing.
Industrial
Rents and occupancies are holding up reasonably well for both Warehouse/Distribution and Flex/R&D properties. Growth rates have, in fact, come down, but this is off unsustainable, pandemic-fueled highs. Some analysts expect slight vacancy increases over the coming quarters, but the market to remain tight enough for rent growth to stay positive in most markets. This will especially be helped by the reshoring or near-shoring of manufacturing.
Office
Vacancy surpassed the previous record high in Q4, increasing 40 bps to reach 19.6%. Absorption for Q4 was at -13.3 million square feet, marking the worst quarter for this metric since early 2021. There’s been a divergence over the past few quarters between emerging and traditionally tech-focused markets. Established tech markets like San Jose and Austin have seen higher vacancies than their emerging counterparts, like Lexington, Greensboro and Oklahoma City. This performance divergence is likely fueled by affordability issues in established markets, and the dispersion of the talent pool due to remote work policies.
The last update for the office sector is that the flight to quality narrative may be reaching its conclusion. National aggregate Class A data is substantially more distressed than its B/C counterparts. Office employees are showing a preference for vibrant, exciting work locations that have more to offer than just an amenity-filled building.
Multifamily
In Q4 of 2023, vacancy climbed 20 basis points, reaching 5.4%. To put this into context, national vacancy was already above the 4.6-4.7% average from the last 10 or so years, and the pandemic peak was at 5.6%. Rent growth turned modestly negative, leading 2023 to slightly trail 2022. Landlord concessions have ticked up, especially in markets that have experienced excessive Class A inventory growth. Some economists expect that market performance will stay soft in the near term until these imbalances work out. Source: Moody’s
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Big News for Realtor Commission Structures
As part of a legal settlement recently announced, the National Association of Realtors agreed to make some policy changes in order to resolve multiple class-action lawsuits brought on behalf of home sellers across the U.S. The biggest change for homeowners looking to sell is they could push back against paying for buyer-agent commissions, which could translate into considerable savings.
The trade group agreed to change its rules so that brokers who list a home for sale on any of the databases affiliated with the NAR are no longer allowed to include offers of compensation for a buyer’s agent. If the court signs off on the settlement, the NAR would implement the rule changes in mid-July. Currently, an agent or broker representing a home seller typically splits a commission — often around 5% to 6% of the home’s sale price — with the agent working on behalf of the homebuyer. Such an arrangement is known in the industry as “cooperative compensation.”
Under the proposed NAR settlement, a broker who represents a seller would no longer be allowed to include a blanket offer of cooperative compensation to a prospective buyer’s agent when they advertise the property on NAR-affiliated Multiple Listings Services, where a majority of U.S. homes are listed for sale. This is meant to remove any incentive from a buyer’s agent to steer their client away from home listings that don’t include a cooperative compensation offer. Source: Fortune
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