Cooling economy lifts US recession expectations modestly

Prevailing uncertainty

The majority of Q2 survey respondents (70%) currently lean toward “uncertain”, with most respondents falling into the "somewhat likely" or "somewhat unlikely" categories in terms of expecting a recession. When broken down by different fund strategies, we found that core strategy respondents were generally less concerned, while those with fund of funds and opportunistic strategies have become more expectant of a near-term recession. All strategies saw an increase in recession expectations in the Q2 survey, indicating a broader trend of rising concern.

Figure 3 – How likely is an economic recession within the next six months? (by investment strategy)

Our Q2 survey also showed an interesting trend in the "I don't know" responses to our recession expectation question. While the overall portion of respondents who are unsure remained small, there were increases in core and core plus strategies, again suggesting a growing uncertainty among these strategies.

According to Deloitte’s recent Q2 2024 United States Economic Forecast, they highlight similar perceptions of the market through their prepared forecast scenarios. Their economists expressed an overall positive near-term assessment of the economy based on a strong first-half performance, and regulatory measures that have made it increasingly likely that a recession will be avoided. However, they note slowdowns from first-half economic drivers, such as job growth and consumer spending, and risks mentioned in the Federal Reserve Financial Stability Report noting “near-term risks to the stability of the financial system: higher-for-longer interest rates; worsening geopolitical conflict and spillovers; and strains on real-estate markets, particularly office real estate”, generate some level of skepticism to counter their optimism. These same points could also serve as a strongly plausible explanation for why so many CRE respondents are hovering between “somewhat likely and “somewhat unlikely” in our Q2 survey.

Implications for the CRE Industry

Shifts in sentiment between our Q1 and Q2 2024 surveys underscore the complex and evolving nature of recessionary concerns within the CRE industry. At the start of 2024, there was high optimism from Wall Street for multiple interest rate cuts, with six to seven cuts forecasted, it dwarfed the three cuts initially mentioned by the FOMC at the end of 2023. This aligned with significant improvements in positive short-term recession and transaction sentiment between our Q4 2023 survey and our Q1 2024 survey. Fast forward to the present, we're past the middle of the year, and there have been no cuts implemented. With the mismatch between investor expectations and the current reality, it should be no surprise that there has been some pullback in positive sentiment about the likelihood and severity of a recession, but it hasn't been deep, or widespread. It seems that the CRE investment community has either quickly come to terms with interest rates staying higher for longer, and/or is still holding onto some optimism buoyed by other positive economic drivers and an improving trajectory for inflation.

One additional item to note, in parallel to recession sentiment, transaction intent has also remained significantly elevated throughout the first half of 2024. However, this intent has not materialized into significant increases in transaction activity compared to 2023.

With our Q3 2024 US CRE Industry Conditions and Sentiment Survey now actively collecting fresh responses, we’ll soon see how resilient the industry’s optimism continues to be, and whether it will translate to improved market performance in the back half of 2024.

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