December 11, 2023

Uncertainty and hope in 2024

The final full moon of 2023 will appear December 27, during the longest, darkest days of the year. Myths blame the lunar cycle for all kinds of strange and erratic behavior, but if you notice extra twitchiness in the people around you this fall, there’s a far more likely culprit: Another famously fraught, cycle-resetting event—the U.S. presidential election—is coming up fast.

Add in the unpredictable interest rates and inflation we’ve seen through this year, plus local economic and political factors, and you get a potent mixture of unknowns we’re all navigating as 2024 approaches. As we step into the new year together, here’s how we see this theme of uncertainty playing out—and where we’re finding glimmers of hope.

The election-year effect

Every election year is a waiting game, but 2024 will present some extra roadblocks for investors. It’s tough to plan for multiple contingencies when the potential outcomes are as wildly different as they are today. And it’s not just about who the president is—it’s about keeping faith in the federal government’s ability and willingness to govern.

As Neal Swanson, our Director of Brokerage, put it, “If Congress won’t do its job, nobody else can do theirs.” So, to the question of what will happen in the commercial real estate industry in 2024, we find ourselves answering: not very much. That’s because we think everyone who has the choice to delay major moves will push their timelines out as far as they possibly can.

In the meantime, we’ll be reviewing data, rehearsing scenarios with our clients and hoping the government carries out its most fundamental processes effectually and fairly. 

Rates on the up (and up)

We wish we could say today’s economy offers a sure antidote for our anxious political climate, but the unknowns are palpable here, too.

In 2023, interest rates crept up steadily, and inflation skipped the creeping and jumped straight to out-of-control. When these numbers tick up, others inevitably fall—and the observable end-of-2023 drop-off in activity is stark. We haven’t seen so little buying and selling of commercial properties nationwide in 20 years.

Meanwhile, for our clients with property portfolios, management and operation costs have increased in every area. And all this feeds even more uncertainty: Will rates keep going up (and can they)? Will access to capital keep shrinking? We don’t know the answers, but we do know that owners, tenants and managers all bear the impacts of these factors.

What’s happening downtown?

Locally, Portlanders are still grasping for light at the end of a long tunnel. Last month, our city council voted in favor of testing out a new form of local government, providing some hope for property owners that necessary changes will start to happen in the city, and especially in downtown.

The top questions we’re hearing include: “What’s happening in downtown Portland?” “When will things return to normal?” “Are people ever coming back to office buildings?”

These questions share a common thread, and even though plenty of experts have been trying to untangle its knot since 2020, they haven’t succeeded yet. We think that’s partly because, while some industries seem to have moved on from the pandemic, time passes differently in the commercial real estate world.

First: A year is nothing to us. Some of the shortest commercial leases have five-year terms, and many more sit between five and 10 years—which means plenty of current leases got signed in that era of blissful ignorance known as “before COVID.” Now, as the loans for those spaces are coming due, owners have to figure out how to keep their buildings.

In commercial real estate, we often talk about the “property clock” framework. In it, a clock face represents the property cycle. If 12 o’clock is the top of the market and six is the bottom, our leadership team estimates the downtown office market is sitting around three o’clock right now, with room to slump.

In the slightly more unsettling words of our president, Jordan Elliott: “Downtown Portland hasn’t yet hit the bottom of the post-COVID, office-specific bloodletting that’s going to happen.”

Here’s the hope

But there’s optimism hiding in Jordan’s words, as macabre as they may sound. The historic practice of bloodletting (which somehow was a standard medical intervention for millennia) was intended to be cleansing and therapeutic, releasing causes of pain and stagnation and allowing the healthiest parts of the body to thrive.

Translation: Even in discomfort, there’s always room for hope. Here are a few bright spots on the horizon as we approach 2024:

  • Interest rates and inflation can’t both go up indefinitely. While we don’t know exactly where things will settle, we can confidently say the economy will achieve some balance eventually. Plus, the fact that inflation has cooled down just a little in the second half of this year shows us that monetary policies aimed at addressing it are working—and that inspires some confidence in our governing bodies.
  • Fundamentally strong businesses will continue to survive and thrive. The historically low-interest rates of the previous two decades have been arguably unhealthy. They’ve helped prop up unviable businesses with artificially low cost of capital, but that’s changing. It’s bad news for predatory lenders and unsound business structures, but those aren’t the players we’re looking for when we talk about reviving our downtown core.
  • A year goes quickly in commercial real estate. Every year is significant and meaningful, of course. But in a grand-scheme-of-things way, keeping the perspective that 2024 is one year among many will be a grounding practice we would all do well to adopt. Whatever Portland’s story is—and ours, and yours—one year won’t define it.

One of our core values at NAI Elliott is “Collaboration magnifies us.” Another is “Relationships mean more than business transactions.” We’ve shared in previous newsletters how, through the darkest days of COVID, we got to see relationships between owners and managers, and managers and tenants, grow stronger. Their teamwork grew as they figured out they couldn’t operate independently of each other and still survive. We can look back on this history to strengthen our perspective and remind each other—and ourselves—that we’re truly better together.

We’ve said it before, but it’s worth repeating: Landlords and brokers, reviving this city is our work to do. Especially with a new and difficult year ahead, let’s be people who rely on each other, lift each other up and reap the rewards of a thriving city together.

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