The tame inflation readings for May emboldened those that believe rate cuts are necessary in 2019. Yet, underlying economic momentum does not appear weak enough to indicate their dire need. Retail sales for April (revised) and May (just released) show an economy that is slowing as fiscal stimulus fades, but not sitting on the precipice of implosion. The geopolitical situation, now the greatest threat to the economy in 2019, complicates the outlook. The market, sensing heightened risk, is looking for rate cuts this year and the Fed should at least signal their willingness to consider cutting. But we still question the necessity of rate cuts and see the risks of a CRE bubble increasing

The largest private development in the history of North America is achieving office rents that are nearly 30 percent greater than the Manhattan market average

The trade policy situation continued to cause whiplash in sentiment last week. After threatening tariffs on all Mexican imports two weeks ago, the U.S. administration backed away from those threats at the end of last week. While we and the markets view that as a positive development, the quickly shifting sands of policy make analyzing and forecasting the economy even more challenging than usual. On the labor market front, we believe that May’s data overstates the pace of slowdown and don’t see that one metric as being sufficient to trigger a rate cut in 2019. Economic momentum is slowing, but not as rapidly as May’s labor data implied. Either way, the Fed now sits squarely in the spotlight with everyone watching their every move. For commercial real estate (CRE), the underlying economy still looks supportive of fundamentals. But that raises our key concern – the low interest rates coupled with solid fundamentals raises the specter of an asset bubble, including CRE.

Trade tensions flared up last week in unexpected ways. With the focus on U.S.-China trade, the administration surprised by threatening tariffs on Mexican exports to the U.S. Markets responded negatively, recognizing the risk for economic growth in the U.S. The increasing risk to the economy raises the prospect of rate cuts, which the futures market already anticipates. The trade war was already reverberating throughout the global economy. Any escalation would likely make the outlook more dire. For CRE, a cloudier economic outlook makes for a cloudier CRE outlook. For now, things still look firm, but the downside risks are increasing, especially for industrial and retail.

The South market’s overall absorption was positive for the third straight quarter, totaling nearly 275,000 square feet over that time or 2 percent of total inventory. Read more in the Q1 2019 insight.

The Back Bay market continues to tighten with availabilities down to 6.4 percent, the lowest in 18 years. Read more in the Q1 2019 insight.