Economic Divergence

Not All Signals Point the Same Way, Requiring a Look Beyond the Headlines

• The September U.S. Consumer Price Index rose 3.7 percent year over year, up from 3.4 percent in August.
• The Producer Price Index increased 6.3 percent year over year, reflecting continued price pressures on businesses.
• Energy inflation rose 20.4 percent over the year, making it a primary contributor to overall inflation.
• Transportation inflation increased 7.8 percent, adding further pressure to consumer and business costs.
• Despite these national trends, inflation remains below the U.S. rate in several metros, including Houston at 1.3 percent, Tampa at 1.9 percent, and Phoenix at roughly 2.5 percent.
• Higher rates persist in other markets, including Hawaii at 5.2 percent, San Diego at 4.7 percent, and New York at 4.5 percent.
• Diesel prices also vary considerably, ranging from roughly $5.60 to $5.80 per gallon across several Southern states, compared with about $8.50 per gallon in California. 
• National averages do not fully capture local economic conditions, underscoring the importance of market-level analysis.

• Rising inflation and interest rates are creating broad-based headwinds for commercial real estate. 
• Yet, economic pressures, including inflation, slowing job growth, and higher interest rates, do not affect every market equally.
• As such, market conditions can vary considerably by metro, submarket, and individual asset.
• Property fundamentals and investment performance can diverge significantly from national trends.
• As a result, select CRE investments can offer compelling opportunities, despite broader economic headwinds.

• Office properties traded hands over the past year at a mean cap rate of 7.6 percent, ranging from 6.3 percent to 9.1 percent.
• Some partially leased office spaces are trading at double-digit yields, offering potential upside through improved occupancy. 
• The average cap rate for multifamily trades was 6.3 percent, ranging from approximately 5.2 percent to 7.8 percent. 
• Retail cap rates span roughly 240 basis points, with even wider spreads across industrial, self-storage, and hospitality asset.
• CRE borrowing rates currently rest in the mid-6 percent band for agency multifamily loans to the mid-7 percent range for other financing, depending on the property and borrower. 
• Higher debt costs could place additional upward pressure on cap rates in the coming months.
• Motivated sellers are adjusting expectations, creating selective investment opportunities.
• Market headwinds vary by property type and location, making deal-level analysis essential.
• As these headwinds subside, demographic trends, slowing construction, and pent-up demand could strengthen leasing and improve property fundamentals.