Executive Summary

  • The Federal Reserve held the federal funds rate at a range of 5.25% to 5.50% yesterday as expected. Additionally, the Fed affirmed that balance sheet reductions would continue as planned.
  • A majority of Federal Open Market Committee members indicated that one more rate hike may be necessary this year. Additionally, they expect to lower rates twice next year versus four times in their previous outlook.
  • Compared with its earlier outlook for 2023, the Fed now expects stronger GDP growth (2.1% vs 1.0% previously), lower unemployment (3.8% vs. 4.1%), modestly higher headline inflation (3.3% vs. 3.2%) and lower core inflation (3.7% vs. 3.9%) at year-end.
  • CBRE continues to believe that real estate investment activity will remain subdued for the rest of 2023 and begin to recover in the first half of 2024.
  • We expect that leasing activity will also remain muted but will begin improving along with the economic outlook in 2024.

The Bottom Line

Despite today’s Fed announcement, many market observers, including CBRE, believe that there will be no further rate hikes this year due to a slowing labor market and the expectation that core inflation will continue to fall.

Although the labor market remains tight, average monthly job growth has slowed to 150,000 over the past three months from 312,000 in Q1 2023 and 400,000 in Q4 2022. Additionally, core inflation is up by just 2.4% on an annualized basis over the past three months. We expect the downward trend in core inflation to continue as the core Producer Price Index has fallen below 2% and consumer spending is likely to weaken as excess savings are depleted.

These mixed economic signals illustrate the Fed’s challenge in meeting its dual mandate of maintaining price stability and maximum employment. The recent increase in oil prices heightens the Fed’s challenge. Given these circumstances, CBRE believes that the Fed will hold rates at current levels at least until Q2 2024—longer than previously expected.

As a result, CBRE expects that capital markets activity will remain subdued until interest rates have stabilized. We believe investor sentiment will begin to improve in Q4, setting the stage for improved investment activity in the first half of next year.