The last 12 months have been tough for commercial real estate investors. Many major markets have seen declining fundamentals and transition into the recession stage of the real estate cycle, as oversupply has driven vacancy, concessions, and declining rents. In the wake of higher interest rates and declining fundamentals, transaction volume remains at its lowest levels in 10 years throughout many major markets, which 24 months ago saw robust demand.
However, economic data seems to point to a much-needed tailwind for commercial real estate, that will come in the form of rate cuts and falling treasury rates.
Q1 2025 GDP shrank 0.3%, and the pull forward of demand as a result of increased inventory from tariffs did not result in the GDP push that many expected. It seems that the economy may not be as healthy as the Fed believes it is, and consumer demand may have contracted materially as consumer spending continues to slow. More importantly, the slowing is most in discretionary and leisure spending, which has historically preceded a recession.
Unemployment continues to grow, and Inflation continues to fall. Indicating that the Fed may soon have to shift their focus from inflation to employment.
Recently, home builders reported the highest levels of unsold inventory in 15 years, despite attempts to lower prices and despite offering rate buy down financing specials. Home buyers are just unable to purchase in this economy. In a similar vein, Winnebago recently reported a significant drop in sales, and revisions to their 2025 forecast. Another indicator of discretionary consumer spending contracting.
The most recent Federal Reserve beige book reports declining economic activity in most districts, driven by economic and policy uncertainty.
The real economy continues to show cracks, and signs of imminent recession, as consumer demand and discretionary spending continue to weaken. This past week Wall street saw the S&P 500 break its all-time high, and quietly in the background, M2 money supply reached all-time highs as well.
This begs the question… where is the increased liquidity going? If the Economy is healthy and robust why is there a need to increase M2? The Fed’s balance sheet actually showed a decline in assets. However digging deeper, the composition of the Fed’s balance sheet show a dramatic increase in “liquidity facilities” which indicates stress on the banking system. This stress and need for liquidity is also being mirrored in the repo market.
While Fed Chair Jerome Powell continues his narrative supporting a healthy economy and the need to manage future inflation, the data continues to show something different, and we are now starting to see descent from other Fed members, including Michelle Bowman and Christopher Waller, who are calling for July rate cuts.
Expect to start seeing rate cuts before the end of 2025
The Fed appears to be behind with its policy, especially in comparison to other central banks around the world who have already started to reduce interest rates. While the market is currently placing a 20% probability of a July rate cut, the economic data leads us to expect multiple rate cuts before the end of this year, and continuing deterioration in the real economy may lead to continued rate cuts into 2026.
While rate cuts could be the catalyst for the commercial real estate market to swing into positive momentum, it is important to remember that rate cuts are a response to a weakening economy and that a deepening recession will have negative consequences for Americans. These negative consequences will include job losses, and home foreclosures which, while unfortunate, will put more demand pressure on rental housing.
We believe that 2026 will see the rebound of both transaction volume and more normal rent growth, and 2027 will see the resurgence of institutional capital into commercial real estate, which will start to drive up asset values. We would expect the reinflation of the asset bubble to be relatively rapid, given that large amounts of capital still existing in the system from the rapid expansion of money supply back in 2020.
To learn more about how we can help you to generate superior investment results through professionally managed Real Estate investments, click here to register for our investor club.
Economic signals point to lower rates ahead
The last 12 months have been tough for commercial real estate investors. Many major markets have seen declining fundamentals and transition into the recession stage of the real estate cycle, as oversupply has driven vacancy, concessions, and declining rents. In the wake of higher interest rates and declining fundamentals, transaction volume remains at its lowest levels in 10 years throughout many major markets, which 24 months ago saw robust demand.
However, economic data seems to point to a much-needed tailwind for commercial real estate, that will come in the form of rate cuts and falling treasury rates.
Q1 2025 GDP shrank 0.3%, and the pull forward of demand as a result of increased inventory from tariffs did not result in the GDP push that many expected. It seems that the economy may not be as healthy as the Fed believes it is, and consumer demand may have contracted materially as consumer spending continues to slow. More importantly, the slowing is most in discretionary and leisure spending, which has historically preceded a recession.
Unemployment continues to grow, and Inflation continues to fall. Indicating that the Fed may soon have to shift their focus from inflation to employment.
Recently, home builders reported the highest levels of unsold inventory in 15 years, despite attempts to lower prices and despite offering rate buy down financing specials. Home buyers are just unable to purchase in this economy. In a similar vein, Winnebago recently reported a significant drop in sales, and revisions to their 2025 forecast. Another indicator of discretionary consumer spending contracting.
The most recent Federal Reserve beige book reports declining economic activity in most districts, driven by economic and policy uncertainty.
The real economy continues to show cracks, and signs of imminent recession, as consumer demand and discretionary spending continue to weaken. This past week Wall street saw the S&P 500 break its all-time high, and quietly in the background, M2 money supply reached all-time highs as well.
This begs the question… where is the increased liquidity going? If the Economy is healthy and robust why is there a need to increase M2? The Fed’s balance sheet actually showed a decline in assets. However digging deeper, the composition of the Fed’s balance sheet show a dramatic increase in “liquidity facilities” which indicates stress on the banking system. This stress and need for liquidity is also being mirrored in the repo market.
While Fed Chair Jerome Powell continues his narrative supporting a healthy economy and the need to manage future inflation, the data continues to show something different, and we are now starting to see descent from other Fed members, including Michelle Bowman and Christopher Waller, who are calling for July rate cuts.
Expect to start seeing rate cuts before the end of 2025
The Fed appears to be behind with its policy, especially in comparison to other central banks around the world who have already started to reduce interest rates. While the market is currently placing a 20% probability of a July rate cut, the economic data leads us to expect multiple rate cuts before the end of this year, and continuing deterioration in the real economy may lead to continued rate cuts into 2026.
While rate cuts could be the catalyst for the commercial real estate market to swing into positive momentum, it is important to remember that rate cuts are a response to a weakening economy and that a deepening recession will have negative consequences for Americans. These negative consequences will include job losses, and home foreclosures which, while unfortunate, will put more demand pressure on rental housing.
We believe that 2026 will see the rebound of both transaction volume and more normal rent growth, and 2027 will see the resurgence of institutional capital into commercial real estate, which will start to drive up asset values. We would expect the reinflation of the asset bubble to be relatively rapid, given that large amounts of capital still existing in the system from the rapid expansion of money supply back in 2020.
To learn more about how we can help you to generate superior investment results through professionally managed Real Estate investments, click here to register for our investor club.