Quarterly Market Insights Q1 2024

MARTIN M. Q. NGUYEN, MRED
Principal, Co-Founder

​EUGENE F. PAGE III
Principal, Co-Founder

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Message from the Team

Welcome to Centre Urban’s First Quarter 2024 Market Insights Report, where we evaluate the current status of the commercial real estate market and review the key indicators we monitor.

Commercial real estate investment continues to face headwinds primarily driven by the US Federal Reserve’s ongoing campaign to combat inflation. This has put pressure on the cost of borrowing and asset valuations, with interest rates on stabilized commercial real estate approaching 8.0% and cap rates expanding over 100 basis points from recent lows. Needless to say, while the greater US economy continues to grow, those in the commercial real estate industry are aware that the investment segment is currently going through a technical recession. We hit the ceiling – should only get better from here - fingers crossed.

Within Centre Urban’s targeted geographies of Southern California and Honolulu, Hawai’i we are observing trends that support our investment thesis that supply-constrained, high-demand markets with high political and geographical barriers to entry, strong household incomes, and robust job infrastructure will better weather turbulent times compared to other major US markets that have experienced increasing new supply and volatile rents. Throughout our investment portfolio, Centre Urban prioritizes historic trends of strong net asset value appreciation, low vacancies and modest rent growth. We continue to monitor the market data to stay informed on major decisions for current assets under management and new investment opportunities.

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Key Indicators

The Fed’s historic rate hike campaign is well underway to combat rampant inflation driven by the aftereffects of the COVID-19 pandemic. Our key indicators are Core Personal Consumption Expenditures, the Fed’s preferred measure for inflation, and the 10-year US treasury bond yield, which influence CRE interest rates and cap rates.

The Fed has increased its benchmark borrowing rate 12 times, totaling 525 basis points from near zero in March 2022 to its last rate hike in July 2023. The current range of 5.25%-5.50% is the highest in 22 years. Inflation continues to trend downward in Q1, with a reported figure of 2.7%- which is significant progress from the peak of 5.55% in Q1 2022 - but is still slightly above the Fed’s 2.0% target. Thankfully, the murmurings of an additional rate hike in December 2023 did not come to pass. However, the Fed policy of “higher for longer” seems to be the prevailing thinking in the financial markets. At the beginning of 2024, most economists were predicting as many as six rate cuts starting March. Now, the expectation is two to three cuts, with the first occurring in September. The 10-year US treasury bond, seen as the “risk-free rate”, has seen significant fluctuations based on the expectation of Fed rate cuts, seeing a decrease to 3.88% in Q4 2023 and is now back to 4.2% in Q1 2024. This has put upward pressure on multifamily cap rates and interest rates, with a significant ~50 bps increase in average cap rates in Q4 2023 in response to the corresponding increase in the 10-year treasury bond in the quarter prior. We are eagerly anticipating the “high water mark” for benchmark rates and commercial real estate fundamentals.

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