2024 Predictions - A Mid Year Update

Today marks the end of the first half of 2024. Wow! Christmas decorations will grace the shelves of do it yourself retailers in no time. Be sure and buy yours early. After all, you’ll want to make sure your Christmas lights are donned by Labor Day. But, I digress.  Today, I thought it would be interesting to take a look at the predictions I made in January of this year to see how they are progressing. It’s always a good idea to make sure you’re on the right track - especially when advising owners and occupants of industrial real estate in Southern California. 
 
So with that as a backdrop, let’s review what I had to say six months ago, how those predictions are faring, and what’s in store for the balance of the year, shall we?
 
Here’s what I had to say in January 2024. Industrial lease rates will soften. This time last year, a client of ours was facing an expiring lease. We tried to find a suitable alternative to move his operation. Nothing was ideal. We advised him to stay put, negotiate a short term fix - 6-12 months and continue our search. His owner would only agree to six months so we had a new deadline - June of 2023. We nearly struck pay dirt in March but jettisoned the opportunity due to its size - just not quite big enough. Once again, we approached his owner asking for some more time. He agreed to extend through December. Our gamble paid off as we secured a suitable building at a 15% discount! Why, you may wonder? Simple economics. We tracked new avails and ones leaving the market and noticed an imbalance. Yep. More was coming than going. We knew someone would drop their rate to secure a great tenant. Expect more of the same this year - especially with Class-A buildings above 100,000 square feet. At last count in the OC - eleven were open for business and seeking a resident. Two left the market last year. Hmmm. Someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin. What’s happening now. Yes! If you read my column from last week, where I discussed the stages in which price reductions occur, you will realize that we are in the concession stage of price reductions. By that I mean, owners, in order to get their industrial buildings leased, are offering more concessions, such as free rent, enhanced brokerage fees, and potentially moving allowances to attract occupants to their vacancies. I would expect this trend to continue until all of the class a inventory above 100,000 ft.² is absorbed. How long will it take you may be wondering? It’s difficult to say, but I suspect by February or March 2025, will be in a short supply situation once again.
 
Here’s what I had to say in January 2024. Expect sales volume to increase. The forces outlined in the paragraph above will trickle into the sales world. By that, I mean  an owner awaiting a tenant may choose to sell. A further catalyst could be the underlying debt on the asset. Imagine you’ve originated a short term construction loan to build a class A structure. You considered construction costs, time to build and lease. Your calculus was based upon conditions in early 2022. You’ve delivered a new building into an entirely different market - longer vacancy and lower rates. Your lender might be getting a bit nervous. When will the maturing debt be repaid? Thus pressure to dispose of the new build. What’s happening now. In the inland areas of Southern California, such as the inland Empire, we are seeing some institutional owners opt to sell their vacancies as opposed to waiting for that elusive tenant. In this manner, they are able to re-deploy the money into a different market with better fundamentals or return principal investment to their investors. If a building has near term vacancy, meeting a year or two, expect this trend to continue.
 
Here’s what I had to say in January 2024. Recession or no? I say no. Last year I took a contrarian approach and predicted we would avoid a recession in 2023. Recall, recession is a decline in gross national product for at least two quarters. I believed in the resiliency of the United States economy, especially the consumer, and we skated by a recession in 2023. As I write these predictions today, the only storm clouds I see on our horizon, are global uncertainty in the Middle East. Specifically, will the Red Sea shipping lane disruption cause inflationary pressures on goods delivered? If this proves to be the case, the federal reserve may be persuaded to delay cuts in interest rates, which are predicted for this year. However, I’m reminded of our status in January 2020. We were rocking along when a microscopic foe sent us to our spare bedrooms. Therefore, beware of the Black Swan event. What’s happening now. So far, so good. In fact, aside from retail sales, our economy seems to be performing fairly well. Unemployment has crept up slightly, but is still at historic lows. Granted, interest rates are higher than they were two years ago, but still much lower than we have experienced in other decades. Will the federal reserve choose to cut interest rates later this year? Only time will tell, but I believe we may see an interest rate cut after the election.
 
Here’s what I had to say in January 2024. Interest rates. Last year, for the first time in a couple of decades, you could actually make money on idle cash. We saw a peak in Treasuries occur last year when the 10 year T-note eclipsed 5%. The rate this morning is slightly above 3.8%. This is good news for borrowers, bad news for savers and could cause an uptick in institutional buying activity. These behemoth money managers are constantly seeking return and might view commercial real estate as a safe haven to earn some additional juice. I believe the 10 year notes will level at around 4 to 4.25% percent this year. What’s happening now. As of this writing, the ten year T note is hovering around 4.2 to 4.3%. This is significantly lower than the 5% we saw at the end of 2023. As mentioned, Treasury interest rates are a great metric for savers but not such a good metric for those reliant upon borrowing - expanding businesses which need to lease space, buy a facility or machinery and hire. I still believe we will end the year with 10 year rates well below 4.5%.
 
So there you have it., What I said, what’s happening now, and what I expect for the balance of 2024 I wish you and yours a very safe and sane Fourth of July. Let’s make the second half of 2024 the best ever! 
 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.