ARE - Office Market Experiencing 'An Existential Crisis'

2024-02-03 07:00:00 ET

Summary

• The market's optimism about the economy may be overlooking red flags, including sticky inflation and the potential for an aggressive easing cycle.
• The office real estate sector is facing significant challenges, including a high vacancy rate and oversupply, as well as remote work trends and technological advancements.
• The $2.2 trillion of U.S. and European commercial property loans due by 2025 are at risk, potentially leading to a credit squeeze and cascading effects in the office market.

This article was coproduced with Leo Nelissen.

If there’s one thing we have discussed in the past two months, it’s the market’s sudden belief that the economy is out of the woods.

The main reason why stocks started to fly in 4Q23 is the expectation that the Fed will turn very dovish this year, with expectations of no less than five rate cuts (it was six a week ago)!

Using Fed Funds Futures, we see that the market expects the current rate range of 5.25% to 5.50% to be the terminal rate, followed by a number of consistent cuts to the 4.00% to 4.25% range on Dec. 18, 2024....

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