The Consumer Price Index (CPI), a broad-based metric gauging the changes over time in prices paid by consumers for goods and services, rose 0.3% in January on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics.

That’s up from 0.2% in December and marked the largest pickup in consumer prices in four months. The CPI’s growth actually slowed year over year, gaining 3.1% in the 12 months through January after picking up 3.4% in the year trailing December. Both monthly and annual CPI gains, however, exceeded expectations, with economists polled by Reuters anticipated a 0.2% CPI increase month over month and a 2.9% increase year over year.

The core CPI, which excludes volatile food and energy prices, grew by 0.4% monthly and 3.9% annually.

Much of the increase from December to January was driven by shelter costs, including rents, which are weighted to account for roughly one-third of the CPI calculation. The price sub-index for shelter rose 0.6% month over month and comprised more than two-thirds of the overall gain from the previous month.

Food prices also saw a notable uptick, increasing 0.4% in January, per the CPI. The food-at-home sub-index rose 0.4% during the month, while the food-away-from-home sub-index was up 0.5%. At the other end of the spectrum, the sub-index for energy dropped 0.9% in January, chiefly due to the decrease in the price of gasoline (which fell 3.3% month over month).

“Markets expected headline inflation to fall below 3% year over year for the first time since March 2021, which didn’t happen,” said Ksenia Potapov, economist at First American Financial Corp. “Prices on energy and goods other than food and energy have been pushing inflation down, but services inflation (which includes shelter) remains high.”

The role of stubbornly buoyant shelter costs in January’s higher-than-expected inflation reading isn’t as gloomy as it appears at first glance, Potapov continued.

“Shelter inflation lags observed prices by approximately 6-12 months, so slower rent growth over the past year is expected to drag headline inflation down over time,” she explained. “For comparison, annual rent growth slowed from 7% in January 2023 to 3.5% in January 2024, according to Zillow.”

As for how, if at all, the report will impact the Federal Reserve’s monetary policy, it likely slams the door shut on a March rate cut and, in all probability, deepens the central bank’s wait-and-see stance before it takes any interest-cutting actions.

“Today’s CPI results suggest a continued slowdown in the Fed’s inflation target,” said CoreLogic chief economist Selma Hepp. “While there is a softening in rents, there are still some stubbornly high prices, which is balancing the nation’s economy on its path to a so-called soft landing. Overall, the nation’s economy remains strong, so don’t expect an interest rate cut this half of the year unless consumer prices take a larger, downward trajectory.”

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Some of the notable factors contributing to this systemic change include a sustained federal financial spending policy, continued growth of wages and labor shortages. Other factors include a vacillating energy transition from fossil fuels to carbon-neutral sources and intensifying geopolitical concerns.

“Commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack.”

Considering this new macroeconomic backdrop, a popular question is, what does this mean for investor portfolios? One prudent move would be to increase allocations in collateral-based cash flows backed by hard assets such as real estate.

More specifically, it makes sense to increase one’s exposure to private real estate credit as banks, which traditionally have been leaders in commercial mortgage lending, have restrained their lending practices. This has created opportunities for nonbank lenders to gain market share from bankable sponsors eager to get their projects financed.

At the same time, the asset class’s expanded revenues have created a compelling risk-adjusted yield, whereby when inflation moves up, so does revenue. This is a major change from the past 10 years when the theme was long growth, long duration and fixed income. We are now in a different environment where the playbook has changed and investors need to adapt.

Investment solutions

The ability to generate stable, inflation-linked income through commercial real estate credit offers a positive solution for investors who might be facing financial obligations or challenges. This asset class offers substantial variations in strategies, risk levels and the ability to invest across the capital structure, including both senior and junior positions. It also allows investors to tailor allocations that align with their long-term goals.

Pension funds, for example, typically seek low-risk credit funds that tend to lend against stable-yielding assets. These assets can generate cash flows that match required payments to their beneficiaries.

That said, not all investors are the same. Many have liabilities that are subject to cost-of-living adjustments that may result in higher payments when inflation rises. Traditional investment approaches typically use long-duration bonds to manage the long-duration liabilities.

During the recent market cycle, however, traditional approaches showed weakness as inflation and interest rates rose quickly. For instance, it is common practice to use swaps and other derivatives to replicate the bond positions necessary to hedge liabilities. As interest rates increased over the past two years, the values of these leveraged derivative positions declined, generating significant losses and creating a short-term liquidity crunch for investors who utilized substantial leverage.

Rethinking bond exposure

Historically speaking, if stocks go down, then bonds rally and investors seemingly always have a shock absorber in their portfolios. But this notion is changing.

Banks had more than $600 billion in unrealized losses at the end of 2022, according to the Federal Deposit Insurance Corp. The Federal Reserve, meanwhile, has about $1.1 trillion in unrealized losses in its System Open Market Account, with a large percentage of that total tied to U.S. Treasury bonds.

Therefore, every time there is a rally in bonds, what will the Fed do? Many believe they will sell, thus driving bond prices down. Moreover, Japan, which happens to be the largest foreign holder of U.S. bonds, is mimicking this playbook. These sales will eventually lead to an increased bond supply, along with investors such as banks and the Fed being underwater in their bond portfolios.

These conditions mean that investors need to think about how much they own in stocks and bonds, with a particular emphasis on the bond market. Alternative products such as commercial real estate credit can help them earn a bond-like yield without the same duration or volatility associated with traditional fixed-income products.

Finding yields

Private real estate credit vehicles that generate stable income while having some inflationary protection can help investors reduce surplus volatility. Investors can also earn higher yields to better achieve their capital-deployment goals with less complexity.

Furthermore, commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack. Tighter capital standards, unrealized losses and higher loan-loss reserve requirements are forcing banks and other financial institutions to hold more capital and issue fewer loans, which is providing opportunities for nonbank lenders to fill the gap.

The multifamily housing sector is an excellent example of this trend in the commercial real estate market. There is a shortage of about 6.5 million single-family homes in the U.S. right now, a result of many factors that include a slowdown in construction dating back to the 2008 financial crisis. Even if multifamily rental units are included in this equation, there is still a deficit of about 2.3 million homes.

The lack of housing, coupled with the need for lenders to step up and fill the gap, provides an abundance of opportunity for well-capitalized nonbank lenders. They can deploy capital into high-quality loans at attractive spreads using relatively conservative underwriting metrics. Commercial real estate credit also offers a strong inflation linkage, produces recurring cash flows and helps to protect returns in a more volatile environment.

Having stable cash flow and the ability to grow income in today’s inflationary environment is highly attractive for investors. This cash-flow resiliency has been particularly true across sectors that private investors currently favor, such as built-to-rent homes and industrial warehouses.

● ● ●

The Federal Reserve appears to be putting a pause on interest rate hikes for the time being, but many experts believe that the commercial real estate market will deal with what is being described as a “higher-for-longer” rate environment than what was originally expected. In the past, the Fed, the European Central Bank and the Bank of Japan used quantitative easing as a road map to indicate their desire to be protective against elevated rates.

Today, they don’t have that visibility as wages, the transition to clean-energy sources, geopolitical concerns and other fiscal issues are all disruptive variables. One thing being learned in the U.S. is that there’s more money in the system than many people had expected. The consumer economy continues to show strength, the services economy is swelling and wage growth has been only nominally subdued. Fed policymakers may not be done with their job until they inhibit the growth of the labor force.

As a result, this higher-for-longer rate environment has created unparalleled opportunity for commercial real estate credit. By staying patient, disciplined and at the forefront of the market, private lenders are strategically positioned to be major players among the sources of mortgage capital and should therefore have a place in every investor’s portfolio. ●

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Its beauty encompasses ski-ready slopes, alpine lakes, sandy beaches and glittering skyscrapers. And it’s a cultural center, where stars are born and trends are set. But for the average Californian, the cost of living is too high. Only 15% of households could afford a median-priced home as of third-quarter 2023, according to the California Association of Realtors. Consequently, California has the second-lowest homeownership rate among all states, trailing only New York.

More construction is desperately needed, but zoning issues, expensive fees, high material costs and scarce land make it difficult for developers. New zoning rules and approval processes have been implemented since Gov. Gavin Newsom took office in 2019, but most changes focus on multifamily buildings in an attempt to ease the state’s rental affordability crisis.

The number of new homes built reached a 15-year high point in 2022, but demand still isn’t being met. State officials say 180,000 new units per year are needed, with about 123,000 built in 2022. About half of those were single-family homes. The state wasn’t on track to meet that number in 2023. From January through November, 53,000 permits were authorized for new single-family homes.

Californians are getting creative to achieve homeownership, despite the challenges and a more expensive mortgage market. Many buyers are choosing to put down more money, with help from family or local downpayment assistance programs. Those who can are paying in cash or buying down interest rates. And many are choosing to “house hack.”

House hacking came to prominence several years ago, and renting out extra bedrooms to help pay the mortgage has become a relatively common practice. But Californians are leading the charge on a different kind of house hacking: the construction of accessory dwelling units, or ADUs.

Zoning changes in 2017 made it much easier to add ADUs to single-family lots in California, and construction of these units grew from 1,100 in 2016 to 20,600 in 2022 — or nearly 17% of all units built that year. ADUs are faster and less expensive to build than traditional homes.

These units can be financed with home equity loans and cash-out refinances. In October 2023, the Federal Housing Administration (FHA) property rehab financing program was updated to allow more ADUs to qualify. Additionally, FHA underwriting will now recognize both existing and anticipated rental income from ADUs to qualify borrowers. California even has a grant program to help lower-income homeowners build ADUs.

This trend may not solve the housing crisis in California, but ADUs can help homeowners afford their mortgage while raising their property value. Even if they’re not being rented, ADUs are a good option for homeowners looking to create multigenerational housing for family members without sacrificing privacy or space in their home. ●

Home sales in California, which slowed significantly in the second half of 2022, rebounded slightly in the second and third quarters of 2023 before falling again. According to the California Association of Realtors (CAR), the seasonally adjusted annual rate of existing single-family home sales in the state totaled 223,940 in November. This was the lowest rate recorded since the Great Recession and represented a 5.8% year-over-year decrease.

Bolstered by a lack of supply, median home prices rose last year. In January 2023, the median price was $751,330, the lowest since first-quarter 2021, according to CAR data. Prices wobbled but rose throughout the year to reach $822,200 in November.

Despite overall growth in home prices, California’s most expensive markets saw the most dramatic declines in the nation, according to a SmartAsset analysis of Zillow data. The Bay Area cities of Dublin, San Francisco, Palo Alto and Fremont were the four cities most impacted, with home values dropping by an estimated 13% to 15% during the year ending in May 2023.

What the Locals Say

The Greater Sacramento market has definitely slowed down in the past year, but it’s still a healthy market, in my opinion. We have a lack of resale homes on the market, but there’s a lot of new home construction in the area. Unlike the Bay Area, we have more land availability, so we have more developers who are taking some of the agricultural lands and expanding out. Our boundaries are pushing out, and we’ve got a lot of opportunity and a lot of growth.

Right now, I would say the majority of homes being purchased are new construction. They have more inventory and there’s more building going on. On the resale side, I would say it’s slowed down, but it’s still a very hot market. If homes are priced right, they’re selling in 10 to 15 days. The market is still strong, but new home construction is stronger than resale.

I’m seeing people from the Bay Area and other states that are wanting to move out of those locations. They want larger homes, larger yards, more community. We have that affordability compared to a lot of major cities in the United States. We have the ability to be outdoors all year round, with accessibility to Lake Tahoe, the Bay Area, San Francisco and Southern California. It’s a lot safer than a lot of other cities, and you have community support and that small-town feel.

3 Cities to Watch

ANAHEIM

Due to its status as an entertainment destination, Anaheim has an economy that differs from many of its Southern California neighbors. Disneyland generates billions of dollars each year for the regional economy. This once-affordable Orange County market saw a 14.2% increase in median home sales prices during the year ending in September 2023, the biggest uptick in the nation. The metro area’s median price is now $1.1 million, while the median price in the city is $875,000.

CHULA VISTA

The San Diego metro area is pricey, with households in nearly every city and suburb paying more than half of their income on major homeownership expenses. The exception is Chula Vista, the bayside city that’s south of San Diego and just north of the Mexican border. On average, homeowners here allocate 48% of their income to mortgage and real estate tax payments, with a median asking price of $725,000 and a median household income of $96,200.

BERKELEY

The Bay Area has seen home values tumble in the past year after prices shot up 36% from 2020 to 2022. Berkeley is no stranger to this phenomenon as the city’s estimated average home value fell by more than 11%, or $183,000, during the year ending in May 2023. But the highly desirable suburb, home to the University of California at Berkeley, was slightly more insulated than some of its more expensive neighbors, which saw prices plummet by as much as 15%.

Sources: Bankrate, California Association of Realtors, California Department of Finance, CalMatters, Forbes, John Burns Research and Consulting, KSWB-TV, Los Angeles Times, Office of Gov. Gavin Newsom, Orange County Register, San Francisco Chronicle, SmartAsset, The Real Deal, The Sacramento Bee

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The benchmark rate remains at its highest point in more than two decades, but with inflation cooling, the Federal Reserve has eased off its hawkish pattern of late. The statement released after Wednesday’s meeting of the central bank’s Federal Open Market Committee (FOMC), which sets national monetary policy, said as much, noting that “risks to achieving [the FOMC’s] employment and inflation goals are moving into better balance.” The FOMC also replaced a sentence regarding “the extent of any additional policy firming that may be appropriate,” adopting a more moderate tone in saying it will be data-driven in “considering any adjustments to the target range for the federal funds rate.”

The Federal Reserve also indicated that several cuts later in the year are likely, offering optimism to a housing industry battered by the elevated rate environment — although Fed chair Jerome Powell was swift to throw cold water on any inkling that cuts may be in the cards by the next FOMC meeting.

“Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence [to lower rates] by the time of the March meeting, to identify March as the time to do that,” he said at the customary post-meeting press conference after being asked if he foresaw rates being reduced in the near term.

“But that’s to be seen. … When you ask me about ‘in the near term,’ I’m hearing that as March and that’s probably not the most likely case or what we would call the base case,” Powell said.

The decision to stand pat may relieve much criticism of the Reserve for now, considering how much vitriol the Fed stirred up over months of near-constant interest rate increases. Marty Green, principal at mortgage law firm Polunsky Beitel Green, posited that clamor for a lowering cycle may heat up soon to maintain a strong economy.

“Like a pilot landing a plane in the fog, the Federal Reserve is being very patient and deliberate before taking additional action to reduce interest rates,” he said. “As long as the economy remains relatively strong and inflation continues to moderate, as it has in recent months, the Fed can circle the runway for another meeting cycle or two before trying to navigate the soft landing it has hoped for.

“But the American consumer, who has been bolstering the economy so far, may very well be running on fumes at this point, and some interest rate relief in the coming months will likely be necessary for the economy to maintain a healthy growth pace.”

Powell, for his part, was resolute as ever in the Federal Reserve’s wait-and-see stance, repeating that “we think we have a ways to go” before the Fed’s target inflation range of 2% is reached. He acknowledged that interest-sensitive parts of the economy, such as housing, have seen outsized impacts from Fed policy. Still, asked about a recent letter sent to the Fed by some members of Congress to make housing more affordable, Powell, like Green, invoked the well-being of the American consumer, but in defense of staying the course.

“The job Congress has given us is price stability and maximum employment. Price stability is absolutely essential for people’s lives, mostly for people at the lower end of the income spectrum who are living at the edges, at the margins,” Powell said. “For someone like that, high inflation in the necessities of life, you’re in trouble, whereas even middle-class people have some scope to absorb higher costs. It’s our job. It’s what society’s asked us to do, is to do get inflation down, and the tools that we use to do it are interest rates.”

That hasn’t stopped many stakeholders, especially within the mortgage industry, to point out that calls for rate relaxation will only grow as the months go on. Rich Traub, partner at commercial real estate law firm Smith, Gambrell & Russell, called the Fed meeting result “a mixed bag” and noted that the “messaging on rate cuts was less than enthusiastic or promising.” Max Slyusarchuk, CEO of A&D Mortgage, said that “markets had already priced in a ‘no change’ from the Fed, but political pressure is mounting on the Federal Reserve to cut rates sooner rather than later.”

“All in all, for the real estate market, I don’t think today’s pronouncements move the market one way or the other,” Traub said. “I still see the market involved in a waiting game, and one that may take longer to play out than what is needed to jumpstart the marketplace.”

So when can the lending sector finally expect a rate cut?

“Unless [FOMC members] bend, we believe rates will begin to start to slowly pull back in the second half of this year, with many economists predicting a mortgage-positive outcome from the May meeting,” Slyusarchuk said.

As for the magnitude of an eventual lowering cycle, Lawrence Yun, chief economist at the National Association of Realtors, reminded the real estate industry not to expect too much easing, but remained confident that an eventual cut will have a meaningful effect.

“Let’s recall that before the COVID-induced economic lockdown, the Fed funds rate was near 2%, and the 30-year fixed mortgage rates were at nearly 4%,” Yun said. “We will not return to this level this year or next year. The budget deficit remains high, and the various inflation metrics remain above the comfort level. That means the mortgage rates will likely be in the 6% to 7% range for most of the year.

“This current rate is lower compared to the high of 8% a few months ago, which is helping to improve housing affordability. More homebuyers will return to the market. Many delayed home sellers may be willing to give up 3%-4% rates as life circumstances have changed, thereby boosting inventory. Home sales will no doubt rise this year.”

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Payrolls rose by 216,000 jobs in December, the largest gain in three months. The increase shattered expectations, with a Reuters poll of economists predicting a gain of 170,000 jobs. Government, health care, social assistance and construction were among the sectors that saw employment growth.

Average hourly earnings were up by 0.4%, flat from November and also surpassing consensus expectations, which called for a 0.3% uptick. On an annualized basis, earnings climbed 4.3% in the fourth quarter of 2023, compared to 4.1% over the whole year, suggesting that wage growth deceleration has abated somewhat.

The strong showing indicated that the economy, despite ongoing uncertainty and predictions of a forthcoming recession, continues to chug along, backed by labor market resilience. But the report also amended figures for October and November, downwardly revising combined additions for the two months by 71,000. And the average of 165,000 jobs added in the fourth quarter is down from roughly 200,000 in the summer, illustrating a clear slowdown remains in place.

Also worth noting was that, while the unemployment rate held steady at 3.7% in December, the surge in the labor force from the prior month was starkly inverted. The labor force participation fell to 62.5%, a sizable 0.3% decrease that brought the figure to its lowest level in nearly a year.

The mixed bag paints the road ahead for the economy in an interesting light. For one thing, the hardiness of the labor market has thus far buoyed consumer spending, which has in turn given employers a relatively green light to add to payrolls. But the impacts of ongoing factors like inflation may push that balance off-kilter.

“The good news is that employers are still hiring, but that rate is beginning to show signs of slowing down,” said Selma Hepp, chief economist at CoreLogic. “Jobs in tourism and other service industry sectors are driving a large portion of the hiring numbers, which will remain positive until the US consumer begins to lower their household spending. Skipping dinner at restaurants is an easy way for families to tighten their belts, for example, so we are watching out for an economic slowdown once that begins to happen.”

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Where does Cushman & Wakefield stand on the potential for a recession in 2024?

We have not been in the soft-landing camp for some time and that is still our position. We believe that the material change in monetary policy will continue to filter through the economy and that eventually we will see a contraction in output. Our forecast is that as we head into the second quarter, we will be reaching that tipping point. That being said, it’s a very uncertain business to predict turning points.

What are some of the market indicators you’re watching?

There are a number of indicators pointing to resilience and strength in the economy, and those tend to be tied to the consumer economy. They include factors such as the labor market, which is strong. We keep adding jobs but at a slower and slower pace. So, those are great signals of resilience, but they are not forward-looking. They don’t tell you anything about the future, but there are a number of leading indicators pointing to a turning point in the economy. They include the 10-year yield curve, which has been inverted for some time. Inverted yield curves tend to be very accurate predictors of recessions.

There are a lot of recessions where the yield curve is inverted about a year in advance. There are other instances where the inversion happened 24 months in advance. Given the sheer fiscal support and monetary accommodations across the economy in recent years, it’s going to take time to work through that. But we are seeing some interest rate-sensitive sectors already in contraction. And on top of higher credit costs, the availability of credit is significantly lower than it was 18 months ago. The tightening of credit standards tends to lead the economy by six to nine months.

What do you see for commercial real estate in the new year?

Both the multifamily and industrial sectors have tremendous supply waves coming. In both sectors, we expect demand to soften, but it will be positive. We estimate between 140 million and 150 million square feet of absorption in the industrial sector, with vacancy rates peaking at about 6.2%. We expect about 320,000 multifamily units to be absorbed and for vacancies to rise to about 9% at their peak.

How about the retail and office sectors?

Our data shows that the vacancy rate for retail is sitting at a 40-year low of about 5%. While we expect demand to soften and turn mildly negative next year, we still see vacancy rates only rising to the low-6% range, which is consistent with mildly positive rent growth.

The greatest challenge is in the office sector. We still believe the sector will be recording negative demand in 2024. This masks a tremendous amount of variation, though, around the country. We’ve seen incredible resilience in many smaller markets, especially in the South. In cities like Miami, vacancies have barely budged since the pandemic.

Then you have San Francisco and New York City, which are experiencing record-setting vacancy rates. Manhattan’s vacancy rate is about 22% right now. We think it will go up to about 24%. But even here we are seeing a lot of variation. We track roughly 1,400 office buildings in Manhattan. There are about 105 or so that have vacancy rates of 50% or higher. If you take them out of the equation, the vacancy rate falls to about 15%. So, there is an uneven concentration of weakness across markets and assets. ●

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These even go as far as redeveloping entire districts. In Somerville, Massachusetts, 20 acres of the Union Square neighborhood is being redeveloped as part of a master plan. Centered around a new light rail station to connect the area to downtown Boston and beyond, the $2 billion project will bring 2.4 million square feet of space crafted for companies in the life sciences, technology, arts and innovation sectors.

Only 2 miles away in Boston’s Allston neighborhood, home of Harvard Business School, a 9-acre mixed-use development is underway. The Enterprise Research Campus will include two new laboratory buildings; hundreds of apartment units; hotel, retail and restaurant space; and a sustainably built conference center.

Outside of Boston, smaller developments are underway. On the Massachusetts border with New Hampshire, the city of Haverhill is redeveloping 3 acres of historic buildings and vacant property in its downtown. Under the tutelage of preservation society Historic New England, Haverhill is slated to gain new retail and commercial space, live-work spaces for artists, housing and a hotel.

Rise Development is planning a $100 million movie and TV studio in the Boston suburb of Braintree in its effort to create a “Hollywood East.” And in Concord, New Hampshire, nearly 1,000 units of housing are being planned for a 135-acre, mixed-use development along the Merrimack River.

Small towns are also getting in on adaptive reuse. In rural northern Vermont, the town of Hardwick is saving its iconic Yellow Barn. The historic building will be transformed into retail space, with a new food and agricultural business center to be constructed next door, providing community cold-storage and warehouse space for farmers.

The overall economy in New England was strong in 2023, with low unemployment rates and stable gross domestic product (GDP) growth. According to August 2023 data from the Federal Reserve Bank of Boston, overall employment in New England has fully recovered from the COVID-19 pandemic.

The leisure and hospitality sector across these states is about 6% behind pre-pandemic levels. But unemployment rates are below the U.S. average across the board, with no state topping 3.5%. Vermont (2%) and New Hampshire (2.1%) had some of the lowest jobless rates in the country as of October. ●

The vacancy rate for industrial properties in Greater Boston continued to climb in the third quarter of 2023, but net absorption rose sharply, according to Cushman & Wakefield. Vacancies reached 6.9%, partially due to a robust pipeline of new construction. Nearly 4 million square feet (msf) of inventory was delivered in the first three quarters of last year, with another 4.7 msf still under development.

Preleasing activity was slow at that time, with the pipeline only 17.7% leased. The impact is far from devastating, however, as Cushman & Wakefield predicted that even if the rest of the delivered inventory for 2023 went completely unleased, the vacancy rate would rise by a modest 60 basis points.

The 495 West submarket, encompassing Boston’s far western suburbs, saw the most marked improvement. The submarket accounted for 51% of Greater Boston’s total quarterly occupancy gains, lowering its vacancy rate by 440 basis points to only 2.2%.

What the Locals Say

The market is tough right now. The issue that we’ve seen on our end is not that rates are too high, it’s just that they went from historic lows to this level way too fast. It’s hard for business owners, now more than ever, to weigh purchasing over leasing.

Here in Boston, we see fairly drastic differences within neighborhoods. For instance, in the Back Bay, the office market has been strong. It’s insulated because it’s a highly desirable area with a live-work feel and a strong residential component. But the Financial District has been struggling and has seen high vacancy rates continuing after the pandemic. On the retail side, it’s similar. There are some areas that are doing well, with relatively low vacancies, whereas downtown — since the daily influx of workers is much lower than it was before — it’s harder for retail businesses to sustain themselves. So, there’s higher vacancy downtown.

Investors, developers and businesses do consistently want to be in Boston because there are so many industries and institutions located here. There are lots of highly regarded colleges and universities like Harvard, MIT, Boston University and others, as well as internationally recognized hospitals.

Life sciences are a big thing in Boston right now, with ground-up developments and office conversions. There’s a constant influx of people to the city, and on the investment side, we seem pretty well insulated from giant upturns and downturns.

3 Cities to Watch

New Haven

Connecticut’s second-largest city is home to nearly 140,000 people. Steeped in history, New Haven’s centerpiece is Yale University. The university and its attached hospital and medical system are the city’s largest employers, combining for about 45,000 jobs. Biotech is another key industry in New Haven, spurred by the redevelopment of former factories into a scientific research campus. Advanced manufacturing and food services are economically significant too.

Springfield

The “City of Firsts” is the third largest in Massachusetts and is famous for innovation. Springfield is the birthplace of basketball and of Dr. Seuss. It’s also the home of the first American-made automobile and the nation’s first military armory, an important facility during the Revolutionary War. Firearms manufacturer Smith & Wesson traces its roots in the city to 1856. Other major industries in the metro area include health care, aerospace and financial services.

Portland

Artsy, outdoorsy Portland is Maine’s most populous city. Its metro area is home to 550,000 people. Originally a fishing and trading settlement, Portland still boasts a working waterfront in the heart of a trendy downtown. Portland has seen intense development interest in the past several years, including new housing, luxury hotels, a convention center, a 10-acre waterfront neighborhood, and the redevelopment of a famous downtown office building into modern mixed-use space.

Sources: Boston Real Estate Times, Business Wire, City of New Haven, City of Springfield, Connecticut by the Numbers, Connecticut History, Engineering News-Record, Federal Reserve Bank of Boston, Maine Business Magazine, National Parks Service, Patch.com, Portland Press Herald, Springfield Regional Chamber of Commerce, Visit Portland, WWLP-TV

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The New England states of Maine, Connecticut, Rhode Island, Massachusetts, New Hampshire and Vermont lead the country in rising temperatures, according to the National Oceanic and Atmospheric Administration. These states have seen an increase of 3 to 4 degrees Fahrenheit since the beginning of the 20th century.

The Gulf of Maine is warming at one of the fastest rates of any body of water in the world in the past five years. In the past few years, blue crabs have been seen with more regularity off the coast of the Pine Tree State.

Rising temperatures could take a toll on industries across the region, according to the Climate Reality Project. Fruit farms could be at risk if unseasonably warm spring weather causes trees to bud early, with crops later lost to frost. Ski resorts support about 44,500 jobs in the region and generate about $2.6 billion in annual revenue. Warmer temperatures could mean later openings and earlier closings for resorts, putting stress on the industry.

The New England fishing industry already sustained a 16% decrease in jobs from 1996 to 2017 due to warming waters affecting the supply of Atlantic cod, shrimp and lobster. Dwindling stocks have forced some boat captains to declare bankruptcy.

About 15 million people live in the New England region. Massachusetts ranks as its largest economy. The Bay State had a gross domestic product (GDP) of $691 billion in 2022, good for 12th among all states. Connecticut ranked No. 23 with $319 billion in GDP. Each of the other states in the region ranked in the bottom half of the nation for GDP size, with Vermont coming in at No. 50 with a GDP of $40.8 billion.

Nationwide, the cost of a home is six times higher now than it was in 1980. Led by the Boston metro area, Massachusetts has witnessed a much higher increase over that time, according to an investigation by The Boston Globe. Home prices in The Bay State are 11 times higher now than in 1980. ●

Home prices in the New England Region were showing signs of heating up last year. U.S. home prices rose by 3.7% in August, according to CoreLogic, but prices in New England posted far higher year-over-year gains.

New Hampshire had the biggest increase in the U.S. with a yearly jump of 9.4%, followed by Maine and Vermont at 8.9%. Rhode Island was fourth at 8.4% while Connecticut tied for fifth at 8.1%.

Massachusetts had four of the nation’s 100 most expensive communities ranked by ZIP code, according to RealtyHop report released this past November. A ZIP code in the Back Bay neighborhood of Boston finished at No. 17 with a median list price of $3.7 million. Connecticut had three of the top 100 most expensive ZIP codes. The vast majority of these pricey locations were in California and New York.

What the Locals Say

I’m in the northeast corner of Connecticut in Windham County. Massachusetts and Rhode Island are 10 to 15 minutes away. What’s happened is people are coming from Rhode Island and Massachusetts because they’re finding that they’re going to have more of a chance to buy a home here, even though it’s still competitive.

There were 386 new listings in the county in October 2023 and 277 of them sold right out of the box within seven days. That’s how fast they were going. They call us the quiet corner, but it hasn’t been so quiet. In 20 years of doing this, it was a wild run and it’s still busy. Our numbers are not where they were last year, but they’re still really close. People have cash. I don’t know where it’s coming from. All appraisals are coming in solid. They’re not coming in under asking price. The comparables are still there.

People don’t care about the rate. If they’re older and smarter, they’ve already been through it. They say, ‘When I owned my first home, I paid 13%,’ so it doesn’t bother them.

It comes in spurts. One week, everything’s happening. The next week it slows down. In October, in this little area, we closed 20 loans. That’s pretty good in this market. Once we start seeing rates in the 5% or even low 6% range, people are going to go crazy and start refinancing.

3 Cities to Watch

Boston

The largest city in Massachusetts continues to struggle in the wake of the COVID-19 pandemic. As of spring 2023, foot traffic in the two ZIP codes that make up the city’s Financial District was down 48% from pre-pandemic levels in 2019, according to University of Toronto researchers. And the regional office vacancy rate stood at 19.1% in January 2023, the highest in 20 years, according to The Boston Globe.

Manchester

This area was originally called Harrytown before being renamed as Manchester in 1810. Affordable housing is a top issue for New Hampshire, but the state is hampered in providing it. Much of the land that allows for single-family homes is already built upon. In Manchester, there are concerns that changes to density, such as allowing for accessory dwelling units, could encourage the creation of short-term rentals.

Stamford

The second-largest city in Connecticut has nearly 135,000 residents. Stamford was already home to three Fortune 500 companies: Charter Communications, credit card provider Synchrony and United Rentals, the world’s largest equipment-rental company. It recently gained a fourth with the arrival of tobacco giant Philip Morris, which relocated its headquarters and brought some 200 jobs from Manhattan.

Sources: Axios, Boston Planning & Development Agency, Choose Stamford, Climate Reality Project, CT Insider, Federal Reserve, HuffPost, Maine Public Radio, Manchester Journal, MassLive Media, New Hampshire Employment Security, Stamford Advocate, The Boston Globe, The Josiah Bartlett Center for Public Policy, The Providence Journal

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The benchmark rate remains at a 22-year high as the Fed continues to wrangle with pulling persistent inflation back down to a 2% target range. But it’s the third consecutive meeting in which the Fed has decided not to raise the rate further, a marked shift after more than a year of aggressive hikes.

Several economic indicators released during the leadup to the meeting of the central bank’s Federal Open Market Committee (FOMC) essentially telegraphed the Fed’s decision, including a Consumer Price Index (CPI) report earlier in the week that showed overall inflation up 3.1% year over year in November. That’s down from 3.2% in October and a vast reduction from the peak above 9% in summer 2022.

Meanwhile, the employment market has continued to moderate and the economy at large has shown signs of cooling after a third quarter that saw annualized gross domestic product growth of 5.2%. The statement released after the FOMC meeting acknowledged as much, with changed verbiage referring to the economy’s strong pace in the third quarter also noting that growth since then has slowed. The Fed also added language to the statement recognizing that, while inflation remains elevated, it has eased over the past year.

Also interesting was a curious one-word addition to the statement.

“In determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed stated. In its previous statement, that sentence appeared identically, save for the word “any.”

It’s a small change that’s likely to be music to the ears of Fed watchers across the mortgage lending and real estate industries.

“We added the word ‘any’ to acknowledge that we are likely at or near the peak rate for this cycle,” Fed Chair Jerome Powell said at the customary press conference after the FOMC’s meeting. “[Meeting] participants didn’t write down additional hikes that we believe are likely, so that’s why we wrote that down. But participants also didn’t want to take the possibility of additional hikes off the table, so that’s really what we were thinking.”

Powell’s overt comment that the peak rate has likely been reached is the first such sign from the Fed and an early Christmas present for the battered housing sector.

“Mortgage markets should be pleased that Jerome Powell acknowledged that the Fed is at or near the end of rate increases for this tightening cycle,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “While not completely removing the possibility of a rate increase in 2024, the changes in the policy statement made clear that this bullet appears to be kept in the Fed’s holster rather than in its gun ready to fire.”

Powell also said that the Fed doesn’t believe a big downturn is in the cards, although he didn’t altogether dismiss the possibility.

“I have always felt since the beginning that there was a possibility, because of the unusual situation, that the economy could cool off in a way that would enable inflation to come down without the kind of job losses that have often been associated with high inflation and tightening cycles,” he said. “So far, that’s what we’re seeing. That’s what many forecasters on and off the committee are seeing.

“This result is not guaranteed. It is far too early to declare victory, and there are certainly risks. It’s certainly possible that the economy will behave in an unexpected way. It’s done that repeatedly in the post-pandemic period. Nonetheless, where we are is we see [economic cooling without widespread job losses].”

Selma Hepp, chief economist at CoreLogic, foresees the beginning of normalization.

“The Federal Reserve’s decision today marks two important milestones. The first is that the Fed confirms that it believes its actions helped tame inflation while also preventing the economy from slipping into recession,” Hepp said. “The second is that housing can begin the slow process of returning to a more normalized rate environment. However, we expect it will be several months before housing returns to smoother sailing and there may yet be some choppy waters ahead.”

Max Slyusarchuk, CEO of A&D Mortgage, agreed about the direction of the rate curve, projecting the slow decline of interest rates through 2024. Like Hepp, he also cautioned that stakeholders, especially homebuyers, shouldn’t expect immediate rewards.

“We don’t expect rates to fall that much in this period and it may not offset rising home prices in hot housing markets,” Slyusarchuk said. “So, homebuyers who wait on the sidelines for better rates next year may find the waiting game didn’t pay the dividends they expected.”

Homeowners who recently bought properties, however, could reap major benefits if rates fall far enough below those of their current loans.

“Since January 2021, there have been 3 million new mortgages originated with interest rates of 6% of higher, the total balance of which being over $1 trillion,” noted Michelle Raneri, vice president of U.S. research and consulting at TransUnion. “The monthly payments of each of these high-interest mortgages averages $2,201.

“If interest rates dropped to even 5.5%, it could result in significant savings for these homeowners, as refinancing at that rate could result in an average monthly payment of $1,917 for them, a reduction of $284 every month. This would represent nearly $300 a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts.”

With hand-wringing over further rate increases now apparently in the rearview mirror, speculation now pivots toward how far and how fast rates could start decreasing.

“The pace of rate reductions in 2024 is now the focus as inflation concerns continue to fade,” Green said. “While nobody in the mortgage world would say, ‘Tis the season the season to be jolly,’ based on current market conditions, the Fed’s outlook at its December meeting points to an increased possibility of a happier new year.”

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Part of the increase was expected, with formerly on-strike personnel in the entertainment and auto manufacturing sectors returning to work and boosting the gain. Economists polled by Reuters anticipated 180,000 additions, while the Dow Jones estimate stood at 190,000 new jobs. A healthy November helped to pull the unemployment rate back down to a four-month low of 3.7%, which might allay concerns by some observers that last month’s 3.9% figure — the highest in two years — was a recessionary warning sign.

Notable gains occurred in the health care and government sectors, with the former adding 77,000 jobs and the latter chipping in another 49,000 new hires. Leisure and hospitality hiring continued its upward trend as well, with almost all of the 40,000 new jobs during the month coming from food and drink establishments. The end of the aforementioned auto worker strike, meanwhile, helped bolster manufacturing numbers, with motor vehicle and auto parts manufacturing employment picking up 30,000 jobs in November.

Despite the favorable figures, however, it remains clear that the labor picture is slowly but steadily weakening. Hiring trends remain on a decelerating pace as November’s total gain ran handily below the past year’s monthly average of 240,000. Average hourly earnings, which rose 0.4% in November after a 0.2% decline one month prior, remain historically healthy (and still too strong to bring inflation down to the Federal Reserve’s 2% goal). But year over year, average hourly earnings are up 4%, down from 5% growth at this time last year. More slowing could be in the cards too, given that for the past three months, the annualized growth of earnings has slid to 3.4%.

It’s an interesting middle ground for the Fed to navigate, with evidence mounting that a drastic recession has probably been averted. Inflation has clearly cooled, but not enough to hit the brakes completely. With the central bank’s policymaking Federal Open Market Committee set to convene for its final two-day meeting of the year next week, the question is whether the economy will dodge a final, exclamatory interest rate hike in 2023.

“Overall, recent labor market data is signaling that a ‘soft landing’ scenario is increasingly likely. While job openings have pulled back, layoffs remain low. More labor supply takes the pressure off wages and makes finding new workers easier,” said Ksenia Potapov, economist at First American Financial Corp.

“November’s jobs report broadly signals that the labor market is cooling but remains strong, which is good news for the Fed and means that the likelihood of another rate hike remains low.”

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