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Annika Scates

2024 Economic Outlook and Commercial Real Estate Predictions

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After a prolonged period of economic uncertainty, there is a notable shift in the sentiment of Americans towards inflation and the overall economy. This positive trend has the potential to drive consumer spending, stimulate economic growth, and even impact the political landscape for President Joe Biden.

In a survey conducted in mid-January 2024, it was found that the optimism about personal finances in the coming year has reached its highest level since June 2021. This optimism is attributed to a combination of factors, including a steady decline in inflation rates, increased incomes, lower gas prices, and a thriving stock market. Inflation, which peaked around 9% in June 2022, has now receded to 3.4%, meeting the Federal Reserve’s annual 2% target over the past six months. Importantly, paychecks have outpaced inflation, easing the burden of a higher cost of living for Americans.

Despite this positive trajectory, prices still remain nearly 17% higher than three years ago, indicating a lingering impact of past inflation. The rapid decline in inflation, coupled with a persistent high cost of living, poses a question in the minds of voters who are grappling with the financial and psychological aftermath of the most significant inflation in four decades.

On the employment front, hiring has remained robust, with the unemployment rate staying below 4% for nearly two years. The prevailing perception is that the economy is continuously improving. However, an economist warns that political factors may limit the extent to which public sentiment can improve. Economic outlooks are increasingly influenced by political partisanship rather than the economy’s underlying performance, and this trend may intensify as the presidential election approaches.

Looking ahead to the summer of 2024, the Federal Reserve is expected to initiate rate reductions. Lower rates will be justified by decreasing inflation, a substantial increase in the national debt, and a boom in commercial real estate activities due to the presidential election. This is anticipated to result in heightened commercial real estate sales, financings, and leases. The lending sector is poised to experience increased loan and deal volumes as interest rates decrease, leading to higher rents and occupancy in key markets. However, urban markets facing challenges such as high crime and homelessness may continue to struggle.

For investors, diversifying portfolios with commercial real estate assets in high-growth, low-tax states is predicted to outperform those in high-tax, high-crime states. Distressed and vacant office buildings in certain urban markets may trade at a significant discount, providing opportunities for strategic investments.

In summary, commercial real estate is expected to experience a substantial boom in sales and financing volumes in 2024, building on the momentum from the previous year.

By Shelly Branscom, CCIM 

LIN Leasing Deals Of The Year

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NAI SunVista is proud to announce the remarkable achievement of winning the esteemed LIN Lease Transaction of the Year award for 2023. This recognition honors the exceptional dedication and excellence demonstrated by our remarkable teams.

The meticulous handling and strategic approach by John Algermissen and Genieve Posen for the 2001-2007 Candelaria Rd. property, combined with Todd Strickland, Rob Bridges, and Riley McKee’s expertise in managing the 6013 Signal Ave NE location, led to securing this distinguished award for both teams.

When asked her thoughts on winning the award for 2001-2007 Candelaria Rd., Genieve Posen had this to say “ NAI SunVista brokers, John Algermissen and Genieve Posen, represented the owners of 2001 & 2007 Candelaria Blvd, located on the eastern frontage road of North Interstate 25. Previously known as Motel 1 and Motel 76, the property underwent a shift from hospitality to long-term stay, facing challenges like vandalism and homelessness. Seeking guidance on bringing their asset to the market for a ground lease, the property owners engaged the NAI SunVista Team.Despite purchase interest from convenience stores and transitional housing facilities, the owners opted for ground lease negotiations with an adjacent property owner. Dealing with complexities such as building demolition, a portion of DOT-owned land, and negotiations with the existing restaurant tenant, both parties successfully achieved their goals through strong negotiations and creative problem-solving. The project’s success lies in a transaction that will aid in transforming a once inactive corner into a development that will enhance the gateway of this prominent industrial trade area.” 

When asked his thoughts on winning this award for the complex handing of 6013 Signal Ave, Rob Bridges has this to say “ Our efforts did play a key role in helping the owner purchase, fix up, and fill up a property with a Tenant that is going to last him a lifetime. He was a first-time investor that with our help and guidance was able to achieve what we consider to be an ideal investment opportunity for locals and other first-timers that are just looking to get their foot in the door.” 

SunVista extends heartfelt gratitude to John Algermissen, Genieve Posen, Todd Strickland, Rob Bridges, and Riley McKee for their tireless efforts and unwavering dedication that contributed to this remarkable achievement.

Albuquerque Market Q3 2023

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Although sale activity has begun to slow in the Albuquerque metropolitan area, there are still buyers and tenants in the market.  Here at NAI SunVista, we have closed approximately 360 transactions, yet the number of our active listings remains steady.  Cash is King and tends to speed a transaction to closing; however, seller financing in the form of Real Estate Contracts are on the rise the 2nd half of the year.  There is still inventory available, however, it may take a bit longer to locate the best asset for you and your business.  

Labor Crisis

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Although the hot pandemic job market is cooling, it is set to remain tight for years.  The US economy has been experiencing an unemployment rate under 4% for nearly two years.

It isn’t just a holdover from pandemic bottlenecks when employers let millions of people go and then struggled to find workers when demand roared back, economists and business leaders say.  It is a storm that has been brewing for decades.  Labor shortages are turning into long-term labor crises that could push wages and turnover higher.

Work experts have warned for years the combination of baby boomer retirements, low birthrates, shifting immigration policies, and changing worker preferences is leaving US employers with too few workers to fill job openings. 

“It is a talent supply chain and talent has a choice,” said Teresa Carroll, chief executive of Magnit, a firm that manages temp, contract, and freelance workers for companies.  Workers are choosing arrangements such as part-time, flexible, or remote work, prompting employers to adapt to fill roles.

As a general rule, an economy is able to grow about as quickly as its workforce expands, plus any gains in how productive the workforce is.  Productivity is difficult to measure.  Overall, productivity growth has been mostly lackluster, rising about 1.4% a year over the past decade. 

After considering AI tools such as Chat GPT whose technology is still too new, and offshoring US manufacturing, it leaves us with immigration.  Immigration has come back strong after falling during the pandemic because of Covid-related policies.  However, it remains a divisive issue.  Business leaders indicate the lack of a coherent, stable policy is contributing to the labor problem.  “If we don’t solve this with a thoughtful immigration program, we’re going to drive wage rates through the roof in the next two to three years because of the systemic shortfall of labor at the end of the day.” John Fish, chairman and CEO of construction contractor Suffolk said. 

Federal Reserve Pauses Rate Hike as Inflation Slows

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The Federal Reserve left the U.S. interest rate unchanged in late September, leaving the main policy rate range of 5.25% to 5.5%, citing an easing of economic conditions while also acknowledging inflation is still higher than its 2% target.  The Fed is waiting to see if its historic series of rate hikes over the last 18 months continues to get inflation under control.  The Fed cited, “The economy is in solid shape, with job gains slowing and tighter credit conditions likely to slow economic activity and stem inflation.” 

In August, the Bureau of Labor Statistics said prices for consumers were up 3.7% from the same period last year.  That’s above the 2% annual level the Fed Says it wants to see, however, is a big change from last year’s peak of 9.1%.  The future of the Commercial Real Estate Market is intricately linked to developments in interest rates and the market’s corresponding adjustments. 

The full repercussions of these changes are anticipated to become apparent in early 2024, shaped by the continual modifications in both interest and cap rates, along with the overall cost of capital. 

Growth in Office Leasing

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Contrary to earlier predictions, office leasing activity improved in the second quarter with the fastest growth rate since Q2 of 2021 according to a Jones Lang LaSalle (JLL) chart.  Although we are not yet back to pre-pandemic leasing absorption, out of the 53 markets tracked, 66% saw quarter-over-quarter growth.  According to Jacob Rowden, manager of JLL Research, the growth is primarily being contributed to large-scale transactions consisting of over 100,000 square feet bouncing back with 38 transactions in Q1 and 46 transactions in Q2.  Additionally, sublease vacancy has begun to slow.

Flight to quality is still the dominant trend for tenants to upgrade to higher-end space as their leases expire.  Class A office space has been healthy in the Albuquerque market for several quarters causing some Tenants to begin to explore premium enhancements within Class B and Class C buildings according to a recent CBRE report.  Amenities such as enhanced security systems and upgraded HVAC facilities are among the top choice amenities today. 

Here in Albuquerque, quality move-in ready space is scarce.  Tenants in the market seeking alternative offices should allow time to tour several properties, select the best fitting space, negotiation the terms and understand construction timelines for Landlords and Contractors to perform the Tenant Improvement work.  Although construction costs are coming down, labor expenses have risen causing Tenant Improvement packages to remain high. 

Shelly Branscom, CCIM is an NAI SunVista commercial real estate specialist who provides substantial long-term strategies and business planning services to her clients.  She prides herself on thinking outside the box, enabling her to contribute unique solutions and outcomes specific to each of her clients.  Learn more about Shelly and her listings.  

NAI SunVista is a full-service commercial real estate company serving New Mexico since 1996. The company is a dynamic commercial real estate firm offering best-in-class real estate services in brokerage, property management, asset management, business brokerage and development services.

Interest Rates Rise Again

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The Federal Reserve announced an interest rate hike by another 25 basis points increasing interest rates from 5.0 to a range between 5.25 and 5.50%, the highest point since 2001.  Chairman Powell says the Fed is concerned about global food security and constrains on the housing supply in part due to homeowners reluctant to move because they have low-interest rate mortgages. 

This expected increase, following last month’s pause, is taking place as the economy continuously cools, with inflation slowing to 3.1% and core inflation (excluding food and energy costs) dropping to 4.8%, the lowest they been since June and September of 2022, respectively. 

Powell’s mission going into the meeting was likely to keep market expectations of another rate rise later this year “priced as a coin flip,” said Daleep Singh, a former executive at the New York Red who is now chief global economist at PGIM Fixed Income. “Pricing the next set of decisions as a coin flip maximizes flexibility for the Fed to react to incoming data.”

In my conversations with lenders, their relationships with borrowers and being creative with their financing outweigh watching a loan go bad.  Additional collateral, higher down payments, and creditworthiness of the tenant(s) all play a role in approving loans. “Lenders will continue to focus on cash flow and debt serviceability, and will remain highly selective, but can be highly competitive for deals they like,” says Henry Vuong, PGIM’s head of Real Estate Investment Research. 

Shelly Branscom, CCIM is an NAI SunVista commercial real estate specialist who provides substantial long-term strategies and business planning services to her clients.  She prides herself on thinking outside the box, enabling her to contribute unique solutions and outcomes specific to each of her clients.  Learn more about Shelly and her listings.  

NAI SunVista is a full-service commercial real estate company serving New Mexico since 1996. The company is a dynamic commercial real estate firm offering best-in-class real estate services in brokerage, property management, asset management, business brokerage, and development services.

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