CRE This Week - What's impacting the United States market?

Elevated uncertainty among small business owners could significantly impact commercial real estate, particularly in the retail and industrial sectors, where smaller tenants often drive demand for space. Declining capital expenditure expectations and hesitancy around expansion suggest a potential slowdown in leasing activity for office, retail, and industrial properties. Additionally, uncertainty surrounding regulatory changes and inflation may delay new development projects, especially in markets dependent on small occupiers. However, with the election now concluded, more clarity and certainty could emerge in the November survey, potentially providing small businesses with greater confidence to make investment and leasing decisions.

Core CPI, excluding food and energy, rose 0.3% month-over-month and 3.3% year-over-year, meeting expectations. Lagging shelter inflation remains a key driver of both non-core and core CPI, which is one reason the Federal Reserve prefers the Personal Consumption Expenditures (PCE) Index to measure inflation. This complicates the outlook for future interest rate decisions. As of November 15, the CME FedWatch tool indicated a 62.1% chance of a 25 basis point rate cut at the November Federal Open Market Committee meeting, but a 37.9% chance that the target rate will remain unchanged, suggesting that relief for commercial real estate from rate cuts may take longer to materialize.

The October PPI report raises concerns for commercial real estate, particularly in the industrial and retail sectors. Annual producer inflation jumped from 1.9% to 2.4%, reversing three months of declines in annual growth. Services price growth has steadily climbed since early 2024, while goods prices turned positive for the first time since July. For CRE owners, these trends may signal weakening tenant stability and an increased risk of vacancies as businesses face mounting cost pressures that could lead to an earnings recession or a reacceleration of consumer prices. The latter could also further complicate the path forward for interest rate cuts.

Retail spending appears strong, with revised September data showing a 0.8% increase and advance October figures reflecting robust year-over-year growth. Non-store retailers, driven largely by e-commerce, posted a standout 7.0% increase, while food services grew 4.3%. Non-store retail remains a consistent bright spot, achieving 5%+ year-over-year growth and supporting positive industrial and warehouse absorption. In contrast, spending growth at grocery stores has significantly lagged historical trends. The inability to sustain post-pandemic momentum may pressure grocers to rethink large store formats or even consider closures if margins fail to improve - posing challenges for owners of grocery-anchored centers.