Economy

A Soft Landing Amid a Changing World

The U.S. enters 2025 with positive momentum in terms of economic growth and easing inflation. Consumers—the bedrock of the U.S. economy—remain in good shape with robust gains in wealth and income. The S&P 500 rose by 22.5% in 2024, house prices by 6.8%¹ and real disposable income by 3.1%.² This in turn should drive consumer spending growth of between 2% and 4% in 2025.

Despite the recent slowdown in job growth, strong corporate earnings and falling interest rates should rekindle hiring in 2025. Households and businesses both remain sheltered from the full effects of high interest rates by the low fixed-interest mortgage and corporate debt that was taken out in the pandemic era.

Although the outlook for government spending is uncertain at the time of this writing due to the re-election of Donald Trump as president, there still is a considerable level of support for the economy as we start the year. The avoidance of tax increases next year is a positive for consumption and investment. The Infrastructure & Jobs Act of 2021 will boost construction activity in 2025 and increased defense spending will support U.S. manufacturing. The prospect of lighter government regulations in certain sectors is also a plus for the economy. Positive momentum will help the economy adjust to higher import prices from tariffs, but reduced labor supply could prompt the Fed to slow the pace of interest rate cuts to prevent a flare up of inflation.

Although the refinancing of commercial real estate remains a work in progress, the U.S. banking sector has made itself more resilient, greatly reducing the likelihood of a financially led recession from a major bank failure. The relatively low consumer loan delinquency rate and reductions in the federal funds rate should support economic growth in 2025.

Figure 1: CBRE Economic Forecast, End 2025

Global Risks

The U.S. economy has avoided recession and pulled off a remarkable soft landing. Nevertheless, there are global risks to the outlook, the biggest of which is a recession in China. China accounts for 18% of world GDP—second only to the U.S. with 25%—and its demand for raw materials drives growth in many emerging markets. China’s housing market has collapsed, mainly due to oversupply, and its consumer spending is very weak. Although the Chinese government has announced significant stimulus, it may not be enough.

A second global risk comes from Germany, which faces a big challenge from weak demand for manufactured exports. However, falling inflation and low unemployment will be enough to generate a consumer recovery in Germany next year.

A third risk is the continued appreciation of the U.S. dollar, which has risen by 12% since 2019. This puts pressure on U.S. companies by making their exports more expensive and on emerging markets by making their dollar-denominated loans harder to repay.

A longer-term risk to the U.S. economy is the federal budget deficit. This is not an immediate problem, since the overall debt-to-GDP ratio is rising slowly. President-elect Trump has proposed levying tariffs on foreign goods to reduce the deficit, offsetting some effects of the tax cut extension. However, the lack of a clear strategy to reduce the deficit likely means higher interest rates and mortgage rates for longer.

Figure 2: Gap Between Government Spending & Revenue

The Economy & Real Estate

For the past 40 years, the real estate and economic cycles have been highly correlated. In the past three years, the end of the real estate cycle has not been accompanied by an economic recession. Moreover, the U.S. economy appears resoundingly at mid-cycle, with low levels of corporate and consumer debt. With the economy in relatively good shape, we should soon see the start of a new real estate cycle driven by tenant demand and falling vacancy rates.

Figure 3: U.S. Unemployment vs. Average Vacancy Rate