Defining Commercial Real Estate in an Uncertain Environment
In a recently released video, “As Uncertainty Rises, Stability of CRE Stands Out,” Marcus & Millichap’s Senior Vice President John Chang explained that we’re currently in a cycle of uncertainty, primarily due to a news cycle in overdrive. The threat of tariffs, immigrant deportations and ongoing news from the Department of Government Efficiency add to the confusion.
“Last October, the U.S. Economic Uncertainty Index was at 109,” Chang said. That index is now at 224, “roughly on par with the uncertainty level during the global financial crisis. And it looks like uncertainty will remain elevated for an extended period.”
What’s the Reality?
The problem is that when uncertainty rears its head, the markets react. “Stock and bond values aggressively move in unpredictable ways,” Chang said.
On the other hand, the underlying economy remains sound, with ongoing healthy GDP growth and job creation, a relatively low unemployment rate and positive inflation-adjusted retail sales gains.
“Although the Fed hasn’t achieved its 2% inflation goal and interest rates are higher than many investors would like, commercial real estate prices have adjusted over the last couple of years to align more closely with the cost of debt capital,” Chang said.
What it Means for CRE
Chang commented that even amid volatility and uncertainty, commercial real estate offers a positive outlook for the following reasons.
Dwindling Construction Pipelines
Multifamily and industrial construction have tapered off. Meanwhile, office and retail construction is also slow. “The policies in play, like tariffs and stricter immigration enforcement, will likely restrain new supply additions,” Chang said.
Demand Inches Upward
Demand for space is growing, even as supply is shrinking. Multifamily continues to do well, while office absorption turned positive in the final quarter of 2024.
Additionally, “we still see pent-up retail space demand in the market, with supply limitations restraining retailers’ abilities to achieve their expansion goals,” Chang said.
The Outlook
Chang said that the CRE vacancy and rent growth should remain positive. “If you consider that new supply will be constrained, while demand for all types of commercial real estate will likely continue to grow, the long-term opportunities offered by commercial real estate become particularly appealing,” he said.
Those opportunities are especially apparent in uncertain times. Commercial real estate can be attractive “especially compared to the potential volatility that increased uncertainty could generate for other investment alternatives,” Chang added.
