Inflation metrics are showing a mixed picture, with the headline Consumer Price Index (CPI) rising 3.1 percent over the year ended January, down slightly from December. Factors such as falling energy prices and stable food costs helped slow inflation, despite ongoing global conflicts. However, the core CPI measure, which excludes volatile food and energy prices, remained steady at 3.9 percent year-over-year in January, signaling sustained core pricing pressures. This trend, coupled with elevated wage and GDP growth, suggests that the economy is still running hotter than the Federal Reserve intends, impacting investor expectations for a rate cut in March. Despite these challenges, the outlook for commercial real estate in 2024 is positive, driven by higher wages boosting household formations and apartment demand. Over the year ended January, average hourly earnings for all U.S. employees increased by 4.5 percent, outpacing core inflation. Government spending programs are expected to further drive household formations, supporting demand within the multifamily sector, which is anticipating an all-time high delivery slate of 480,000 units this year. As a result, the nation is expected to see its second-strongest calendar year for net absorption since 1994, slowing the annual vacancy increase and boosting effective rent gains to 1.5 percent.
The Federal Reserve is taking a cautious stance, with markets indicating a less-than-15 percent chance of a rate reduction in March. The economy is showing signs of expansion, and higher wages, along with increased asset values, are bolstering consumer spending power. This suggests that the central bank will likely hold rates steady to manage growth, even as pricing pressures flattened over the second half of 2023. The trailing six-month annualized rate of core Personal Consumption Expenditures (PCE) inflation during this period was only 1.9 percent, below the Fed's 2.0 percent target. Officials have indicated that they want to see sustained lower inflationary pressures over a longer time frame before considering changes to fiscal policy. Despite inflation concerns, the Fed's cautious approach to rate hikes is expected to support continued growth in the real estate market.