Forecasting CRE Investment in a Chaotic World
I’ve been a professional economist for 25 years and when people ask what I do for a living, the response to my answer varies from boredom to asking where I think mortgage rates will go. I’ve never experienced expressions of sympathy—until now. It’s tough enough trying to forecast the economy when stable conditions exist, but the recent policy announcements and U-turns have given me intellectual whiplash. Businesses and investors can only underwrite and adjust to various economic scenarios when there is stability around those macro assumptions.
A key consideration is whether we incorporate tariffs on Canada and Mexico into our macro model. This is still unclear, which makes forecasting and underwriting more difficult.
To address this uncertainty, we have changed the risks around our base case for economic growth and the outlook for interest rates, not just in America but globally. In the U.S., we started the year believing in the inherent strength of the economy. The jobs market appeared robust, underpinned by the continuing strength of consumer spending and sentiment. Although inflation was far from being defeated, we had high conviction that the U.S. economy could thrive, despite bond yields in the low 4-percent range.
Now, the near-term growth outlook has weakened. Job cuts initiated by the Department of Government Efficiency will add to the unemployment rate since it’s not clear that career white-collar civil servants can easily be reabsorbed to fill private-sector shortages, which are mostly for skilled blue-collar workers.
It’s tough enough trying to forecast the economy when stable conditions exist, but the recent policy announcements and U-turns have given me intellectual whiplash.
Uncertainty around employment, coupled with a resurgence in food prices and concerns about the cost of living have dented consumer confidence and spending. Wealth destruction, when the equity market falls (at the time of this writing, the NASDAQ is in a technical “correction”), will further dampen the U.S. economy. Bond markets have swung from originally predicting no cuts at the beginning of the year, to now predicting three cuts to the Federal Funds rate by the end of the year.
By contrast, the risks to our European macro outlook have tilted toward an upside. The recent realization that Europe can no longer depend on the American defense umbrella, as implied by membership in the NATO alliance, has moved the political discourse toward fiscal stimulus and rearmament. This development is particularly welcome in Germany, the Eurozone’s largest economy and its manufacturing heartland. Germany spent 2023 and 2024 in a recession, triggered by a painful adjustment away from cheap Russian energy and the disruption to its core car industry from shaky demand for electric vehicles.
Events continue to unfold rapidly, and the view will evolve over the coming weeks and months.
The new German Chancellor, Friedrich Merz, supports the abolition of Germany’s “debt brake” that keeps its budget deficit below 0.35 percent of GDP. If Merz ushers in a fiscal stimulus, this could reinvigorate the German economy and put Europe on more secure economic footing.
Events continue to unfold rapidly, and the view will evolve over the coming weeks and months. We believe it’s too soon to make a wholesale change, but these tilts to the respective risks around our base case clearly suggest that investors need to reconsider their portfolio tilts to reflect the changing risk metrics in each region.
Sabina Reeves is chief economist & head of insights and intelligence at CBRE Investment Management, associate fellow at the University of Oxford and council member of Marlborough College. Follow Reeves on Threads: @sabinareevesconomist or on Linkedin.
Read the April 2025 issue of CPE.
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