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  • Writer's pictureRealFacts Editorial Team

Soft, Hard, and No-Landing Scenarios for Commercial Real Estate

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Investors are carefully monitoring economic forecasts, akin to anxious passengers on a turbulent flight. Will the economy experience a soft landing, a hard landing, remain in a holding pattern, or face a turbulent and dangerous descent? John Chang, Senior Vice President of Research Services at Marcus & Millichap, recently delved into these scenarios, providing insights into the potential economic trajectories.

Chang outlined four possible economic scenarios: soft landing, hard landing, no landing, and stagflation. Each scenario carries distinct implications for inflation, economic growth, and employment.

1. No Landing: This scenario envisions robust economic growth coupled with persistently high inflation.

2. Stagflation: Here, the economy stagnates while inflation remains elevated, often accompanied by sharp increases in unemployment.

3. Hard Landing: Reduced inflation is achieved through a recession, leading to economic contraction.

4. Soft Landing: Inflation falls without triggering a recession, maintaining stable employment levels.

Current Economic Indicators

Chang highlighted several key metrics to gauge the economic outlook. In March, the annualized three-month course CPI reading surged to 6.6%, the highest in a year. Concurrently, March saw 310,000 new job additions, marking the most significant job creation since January 2023. These figures initially suggested a no-landing scenario, characterized by strong economic growth and sustained inflation.

However, more recent data indicates a moderation in inflation. "Core CPI on a trailing three-month average came back down to 4.1% in May, and the month-to-month trend has been positive," Chang noted. Despite this, job creation has slowed, with more downward revisions in recent months' numbers than upward adjustments.

Federal Reserve Chairman Jerome Powell offered a perspective on the current economic landscape. "I was around for stagflation, and it was 10% unemployment and high single-digit inflation. Right now, we have 3% economic growth, which is pretty solid, and we have inflation running under 3%. So, I don't see the stag or 'inflation,'" Powell stated. This leaves the economy teetering between the possibilities of a soft or hard landing.

Walking the Tightrope

Chang emphasized the delicate balance the economy is navigating. "If the Fed holds rates too high for too long, or if we're hit by some other unexpected economic curve ball like very severe weather, a major geopolitical event, or a major supply chain disruption, then a recession is possible," he warned. Indicators suggesting potential economic softening include the ISM manufacturing index, which registered 48.7 in May, and a rise in unemployment to 4%. Additionally, consumer sentiment and confidence have plateaued.

Despite these concerns, Chang remains cautiously optimistic. "At the moment, our baseline scenario, the soft landing, likely brings mildly positive space demand with the hope of a Fed rate cut later this year." He acknowledges the inherent risks, advising vigilance. "This is why you always need to keep your eyes on the horizon," he remarked.


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