Welcome to my newsletter!
Sunshine Corner is SRR Consulting’s bi-monthly newsletter with updates, news, and Sara's views on the US economy and commercial real estate.
Issue 2024:1, Spring Equinox
The first issue of Sara's Sunshine Corner is a special edition for the Spring Equinox. This timing also works well for sharing thoughts about today's interest rate decision.
FOMC Outlook: No cut in March
SRR Consulting expects the federal funds rate to stay in the current range of 5.25% to 5.50% after the FOMC meeting concludes today. Higher-for-longer remains the expected path as the Fed is unlikely to begin rate cuts until core inflation is trending below 3%.
As of February, annual CPI inflation was 3.2% and has held in the low 3%-range since October 2023. Core inflation was 3.8% over this period, influenced by housing costs. According to Apartment List, year-over-year market rents declined 1.0% in February and have been edging lower on an annual basis since last summer. As CPI rents catch-up to market trends, core inflation should continue to drift down.
Lower inflation gives the Fed room to normalize rates. Maintaining a positive, real federal funds rate of around 2% would keep the economy growing without raising the risk of recession. A recession is not a necessary condition for inflation to normalize and the Fed's dual mandate should keep policy from staying too tight for too long.
Real Estate: Repricing is good, actually
The sector may be everyone's favorite punching bag, but I find this to be overblown. Real estate cycles happen and, when they do, it presents opportunities to bring properties to their highest-and-best use.
Yes, the correction phase of the cycle also squeezes over-leveraged buyers out of projects with improper underwriting. This can be painful for buyers who made optimistic mistakes, but the wealth required to directly buy commercial properties tends to ensure such investors land on their feet. Lenders are willing to work with their borrowers and, if not, the Fed, FDIC, US Treasury, and National Credit Union Administration have thoughts to share.
The repricing cycle has been slow and is not yet complete, especially for office properties. Private real estate capital values declined 14.5% from mid-2022 through year-end 2023, per appraisal-based valuations from NCREIF members.
The Green Street Commercial Property Price Index (CPPI) shows that market pricing for real estate is down 21.4% over the same period. This market-based measure examines transaction prices for properties under contract that may or may not close. It is an important distinction because the CPPI indicates that property prices bottomed out in November and have edged higher through February 2024.
Appraisal values still have room to adjust lower, but I expect the reset will be complete in 2024.
Announcement! SRR Real Estate Quarterly
Beneath these headline numbers are wide variations by property type that will be covered in detail in SRR Consulting's Real Estate Quarterly (REQ) report.
The inaugural issue of the REQ will be available to paid subscribers of the Sunshine Corner as a treat on May 3 with coverage of Q1 2024 private real estate performance.
Thanks for reading!
Fun Facts: Sunshine marks the start and end of each day and illuminates the moon to mark the start and end of each month. New data covering the economic and demographic drivers of real estate performance are released at differing monthly and quarterly cadences such that an important data release occurs at least once a week. It is chaos. To build this newsletter's calendar, I chose to follow sunshine and release this newsletter twice per month, at the start (new moon) and end (full moon) of a lunar month. Problem solved. 🌞