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

Heightened economic uncertainty, driven by ongoing tariff discussions, continues to pressure small business owners, who are key drivers of demand for retail, industrial, and office space. Expansion plans are increasingly strained as owners contend with lower sales expectations, labor shortages, and tighter financing conditions. The percentage of owners expecting higher real sales volumes fell by 11 points in March to just 3%, marking the third consecutive month of declining expectations. With 40% reporting unfilled job openings, labor quality remains a significant concern. Additionally, 6% of owners noted that capital has become more difficult to secure, the largest increase since September 2023. This data reflects the period leading up to the April 2 tariff announcement, suggesting that the outlook may have shifted further since then.

The report showed large increases in both sales and inventories, signaling that wholesalers are preparing for supply chain disruptions possibly tied to impending tariff impacts. The dynamic suggests that both industrial and retail sectors could experience shifts in demand for storage and distribution space as wholesalers adjust their inventory levels ahead of potential trade uncertainties.

Price pressures surprised to the downside, softening through March, potentially reflecting weakening demand from consumers and producers. Given that the measures tend to move together, the soft CPI and PPI data released this past week have many market participants revising their March PCE estimates (Fed’s preferred measure, to be released April 30) lower. However, while the March data showed progress to the Fed’s target inflation range, it also did not include the impact of the on-again-off-again tariffs, which are expected to raise inflation. University of Michigan’s Consumer Sentiment report showed that year-ahead inflation expectations jumped 0.6% in March, from 4.3% in February, the highest reading since November 2022. The inflation picture remains complicated and confusing, for consumers, businesses, and the central bank – contributing to the rising uncertainty in what the months ahead may hold for the economy, capital markets, and commercial real estate.

While much of commercial real estate is not directly exposed to short-term swings in sentiment and public market securities movements, the sharp increase in uncertainty and volatility in the markets are worth paying attention to, as they may challenge or delay decisions by occupiers (expansions, renewals, relocations), capital partners (cost and availability), and owners/investors (capital improvements, acquisitions/dispositions).