The Fed is holding its final meeting of the year this week and they are likely to leave interest rates unchanged. After rapidly increasing interest rates through the first half of the year, the Fed has now kept rates stable since July. Many market prognosticators expect rates to drop next year, with some calling for rate cuts as soon as the spring. Given the strength of the economy, I would not expect to see rate cuts until late next year at the earliest.
Concessions have been increasing in most markets across the country. The winter is often the season where we see highest concession activity and given the downturn in fundamentals in recent months, concession activity is even higher than in recent years. San Francisco and San Jose have the highest average concessions.
The U.S. economy was given another boost last week as Q3 GDP was revised upward to an annualized rate of 5.2%, making the rate of growth last quarter more than double the rate for the first half of this year. Q3 was also the strongest quarter for economic growth since 2021 when the U.S. economy was still working through the volatile declines and subsequent growth resulting from COVID-19.
Higher borrowing costs and construction costs have hurt the development market throughout 2023. The historically high levels of current construction have also led to a major slowdown in new projects breaking ground. Developers are now cancelling projects at a steady clip nationwide.
It was a fairly quiet week in the U.S. economy as the Thanksgiving holiday limited data releases last week. Existing trends continued from the prior week as the 10-year treasury continued to drift lower. The yield on the 10-year is now 4.42%, nearly 60 basis points below its recent peak in mid-October.
This week we examine the top and bottom performing markets on a net effective rent basis. We have talked a lot about the markets that are both outperforming and underperforming in the previous charts of the week and rent and operating trends report, yet a key distinction that continues to hold true is the severity of the declines in the worst performing markets compared to the modest gains in the best performing markets.
Is the monetary tightening cycle over? Has the Fed orchestrated the illusive soft landing for our economy, reducing inflation to a sustainable level without sending the nation into recession? The answers to these questions are still yet to be fully determined, however last week’s lower inflation report provides further evidence that future interest rate increases me not be needed.
The third quarter tends to be a period of the year when rent growth levels off, however with ample supply coming online and demand waning in 2023, a number of markets posted significant rent declines in Q3. Austin leads all markets as rents fell more than 5% in the third quarter.
The 10-year treasury is down about 35 basis points from its recent high in mid-October as signs of slowing fundamentals in the economy continue to arise. Mortgage rates have also fallen in recent weeks, prompting a slight uptick in demand for mortgages. The recent drop in mortgage rates may bring some renters back into the buyer pool, cutting into multifamily performance, however, I expect this to impact apartment demand only marginally.