According to Keith Prather, managing director & co-founder of Armada Corporate Intelligence and the keynote speaker at the 2024 KCRAR Commercial Real Estate Forecast held last week, the economy will continue to grow.
Prather discussed two major concepts that will influence the Kansas City commercial real estate market for the next 18 to 24 months, and potentially even longer. The first of these concepts pertain to the actions of the Federal Reserve regarding interest rates, while the second involves what Prather described as altered or disrupted supply chain management dynamics.
Prather said there still are a lot of questions about whether the Federal Reserve will raise interest rates. The first of several rate hikes started in August 2022, without the desired effect of lowering inflation. It wasn’t until the data was released for August 2023, that the Personal Consumption Expenditures (PCE) Price Index started to show a trend toward the desired result. Inflation fell to 3.9 percent. The Federal Reserve’s goal is 2 percent.
If inflation continues to go down as it has done over the past year, Prather said he thinks “we’re in pretty good shape.”
In making the determination of what to do about interest rates, Prather said the Federal Reserve looks at job openings, the unemployment rate, and wages.
“In this case, bad news for job openings is good news for the Fed. They see an economy that’s cooling as we start to absorb those jobs. But what’s happened is just in the last month, job openings jumped from about 8.6 million back up to almost 9.4 million and went the wrong way. So we saw job openings expand,” he said.
With respect to the unemployment rate, it is almost at an all-time low.
“It’s just not moving,” Prather said.
The latest available data shows that approximately 61 percent of households in the United States are living paycheck to paycheck, and this equals about 78 million households. Prather said that if the Federal Reserve fails to get inflation under control, 78 million households may not make it financially.
“You start to see credit defaults. You start to see things spiral in the banking community. That’s why [the Federal Reserve] is so fixated on getting inflation back down to that 2 percent rate,” said Prather.
Prather said he thinks the Federal Reserve is done raising interest rates.
“So we’re probably at what is the peak rate and then through 2024, you start to see a little bit of deceleration of interest rates, which will be fantastic for the commercial market,” he said.
“So if I'm a developer, and I'm thinking about the future, and I want to start a big project, at least I know right now, with a certain degree of confidence, that toward the end of next year, I've got some decelerating conditions, decelerating at least interest rate conditions and so I can start to plan and I can start to make some decisions on some long term types of projects I might want to get engaged in,” said Prather.
The headwind is what happens in the banking sector. The extension of bank credit is down right now.
According to Prather, the real estate sector will take a bit of a dip in the first two quarters of 2024 before it picks up momentum in late 2024 or early 2025.
Prather said based on some recent surveys, 70 percent of the projects that were delayed a year ago were because of supply chain challenges and problems finding labor.
“Today, it is completely inverted. Today, 70 percent of the project delays that we’re seeing are because they can’t find funding. Can’t get credit,” he said.
Prather said the industrial sector is strong. “We’re spending $200 billion a year and building manufacturing capacity in the United States. . . That trend will continue, and we believe that Kansas City is really neatly positioned to be able to pick up a large percentage of that growth,” said Prather.
Prather said he thinks supply chain issues will present a challenge for commercial construction. Global markets still haven’t recovered fully from the record backlogs some of the biggest ports experienced during COVID. Factors such as low water levels in the Panama Canal and the Rhine River in Germany, conflict in the Middle East which could affect the use of the Suez Canal, and ongoing trade wars all have impacts on the supply chain.
Twenty-two components that go into the country’s most advanced weapons systems come from an adversary country. Other critical items like baby formula, food industry products, and a lot of high-tech materials depend on a secure supply chain.
“And so regardless of what’s happening in the economy, you’ve got supply chain managers that are being forced to go in and change their sourcing. They’re being forced to re-shore manufacturing or at least near shore it in Mexico. And that trend is so profound,” Prather said.
The biggest black swan event Prather said to watch that will have a global impact is what happens to oil prices if the United States imposes sanctions on oil exports because of events in the Middle East.
_______________________________________
FEATURE PHOTO CREDIT OF KEITH PRATHER: MARCIA CHARNEY | MWM KC