As investors eagerly await the release of Thursday’s inflation data (1/12, 8:30 AM), U.S stocks have edged higher. The S&P 500 added 0.4%, DJIA gained 0.4%, and the Nasdaq Composite advanced 0.5% in the early trading window. A volatile trading environment is likely to follow the release of the December inflation report as markets digest the news. The Federal Reserve, which meets on January 31st, will closely monitor this release, and its outcome will have a significant impact on ensuing rate increases. Economists expect consumer prices to have risen 6.5% on an annual basis. This would be an encouraging sign for investors as it marks a potential drop from last month’s 7.1%.
In the government bond market, yields have ticked down. The yield on the benchmark 10-year U.S. Treasury note fell to 3.57%, from 3.62% Tuesday.
Sentiment amongst Commercial Real Estate professionals remains strained as we enter 2023. Inflationary concerns, triggering the response of the Federal Reserve, have injected uncertainty in the market with the fear of recession looming. As indicated in our previous Market Report, November 2022 marked the third consecutive month of rental declines and represented the largest cumulative cut for any three-month period since 2010. This trend points to the moderate easing of shelter inflation and further affirms the Federal Reserve's aggressive monetary policy in the latter half of 2022. With the January 2023 Fed meeting expected to bring fresh news of interest rate increases, it is likely that rental / home prices will continue to cool.
Despite this, select market-types are more resilient and have the ability to outperform the broad US market during times of uncertainty. One market profile to monitor is college town markets; the cities surrounding large universities (Ann Arbor, Tallahassee, Madison, College Station etc.) offer a strong economic anchor and steady demand as colleges begin to operate more in line with pre-pandemic norms. These areas have maintained stability in the face of national performance slowdowns in recent quarters which is highlighted in Q42022 where college town markets saw positive quarter-over-quarter growth while national rents were cut roughly 1%.
Affordable, low beta markets will also be a market profile to track in 2023; The Great Lakes, Heartlands, and pockets of the East Coast (except for New York and D.C.) have shown a great deal of stability whether the national market is in a state of growth or contraction. Though performance variation is not as prominent during times of market fluctuation, cities like Cincinnati, St.Louis, Cleveland, and Virginia Beach have sound economic infrastructures to adapt to changing economic conditions.