Despite 2022 forecasts to the contrary from economic models and pundits, 2023 did not end in recession. In fact, the U.S. economy grew faster than any other large advanced economy last year — by a substantial margin — and is on track to do so again in 2024.

As reported by Axios, “Many economists and finance experts believed the Fed’s battle to tame high inflation with rapid interest rate hikes would trigger high unemployment and a recession, as it had in the ’70s. Instead, the economy grew.”

In July 2023, Chicago Federal Reserve President Austan Goolsbee said 2023 was part of a “very strange business cycle.”

“The Fed’s overriding goal right now is to get inflation down. We’re going to succeed at it and to do that without a recession would be a triumph. That’s the golden path, and I feel like we’re on that golden path. So I hope we keep putting off the recession forever. Let’s never have a recession again.”

The absence of a 2023 recession is welcomed news for commercial real estate. Recessions typically involve less employment, slower sales, and falling stock prices, none of which help fill office space, industrial buildings, or commercial hubs.

What About 2024?

At the end of 2023, Goldman Sachs said we were on track for a soft economic landing. They predicted that core inflation would drop as much as 2½% by late 2024 and that the probability of a U.S. recession this year is just 15%. Such a forecast would certainly be better for everyone.

The Fed, Right or Wrong?

The Fed has the final word when it comes to raising or lowering U.S. bank rates, decisions that ultimately influence interest levels, spending, investment, and — in many cases — profits.

Despite using models, economic theories, financial history, and other tools to understand the economy, the Fed cannot guarantee results. According to the Fed, “The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events.”

As former Fed Chairman Alan Greenspan once admitted, “We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.”

Between March 2022 and July 2023, the Fed increased the federal funds rate — the cost banks pay to borrow overnight — 11 times, from 0.25-0.50% to 5.25-5.50%. That’s a full 5% jump. These increases, in turn, caused the prime rate and other rates to quickly ramp up.

The purpose of the Fed’s increases was to lower inflation toward a 2% annual target, while at the same time avoiding a recession and massive layoffs. In general, the 2023 results looked like this:


  • Inflation  The Consumer Price Index, which measures how much consumers pay for goods and services, reached a high of 9.1% in June 2022 — the highest level since 1981. By December 2023 the Index had dropped to 3.4%.

In December 2023, notes from the Federal Open Market Committee — the group that determines the Fed’s interest rate policy — said that members “largely converged around the view that the peak level of the federal funds rate for this tightening cycle had been reached.” This comment, and three other references to “peak” inflation levels, all suggest that the Fed is anticipated to hold interest rates steady as it did for the fifth time in January 2024.

  • Interest Rates  Rates began to soften at year-end once the Fed suggested a halt to increases in the federal funds rate. Thirty-year, fixed-rate residential mortgages, for example, went from 7.79% in late October 2023 to 6.60% in mid-January, according to Freddie Mac.

Looking forward, the Mortgage Bankers Association expects the fourth-quarter federal funds rate to go from 5.375% in 2023 to 4.625% by the end of 2024.

  • Labor The December labor participation rate reached 62.5%, nearing the pre-Covid 63.3% we had in November 2019. Labor productivity grew 4.7% in the third quarter of 2023 versus 0.4% a year earlier.
  • Jobs  Unemployment fell from 6.3% in January 2021 to 3.7% in December 2023. In comparison, the long-term unemployment rate is 5.71%, according to TradingEconomics.
  • Stock Market Indexes  The Dow went from 33,136.37 on January 3rd to 37,689.54 at year-end. The S&P 500 moved from 3,824.14 to 4,769.83 during the same period. “A year ago,” said Axios in December, “no one on Wall Street was predicting that kind of ride.”

According to The Wall Street Journal, the S&P 500 had a 24% gain in 2023, adding that “The Dow and Nasdaq similarly closed out 2023 with big increases, defying the impact of higher interest rates, a regional banking crisis, and wars in Ukraine and the Middle East.”


Changing Outlooks

Economist Paul Krugman, a Nobel Prize winner, argues that the Fed has been on target. Writing in The New York Times, Krugman said in December that “From an economic point of view, 2023 will go down in the record books as one of the best years ever — a year in which inflation came down amazingly fast at no visible cost, defying the predictions of many economists that disinflation would require years of high unemployment.”

CNBC’s Bob Pisani put it this way: “It’s all nonsense. Unfortunately, stock pickers, analysts, strategists, economists and even the Federal Reserve are no better at forecasting the ‘old economy’ than they are the ‘new economy.’

“It’s true that Covid and the Russian invasion of Ukraine threw off forecasts,” said Pisani, “but that’s beside the point: Wrong forecasts are the norm, not the exception. Wall Street, and everyone else, are routinely wrong, and it has nothing to do with Covid.”

There’s no doubt that the banks did well in 2023. The industry had a $79.8 billion net income in just the first quarter, a record result.

Are Office-To-Apartment Conversions a Good Solution?

According to the National Multifamily Housing Council, the shortage of apartments will exceed 4 million by 2035. Conversion sounds like an enticing idea to address the shortage. While the conversion concept is attractive, many office properties are not suitable multifamily candidates. Too few windows, the need for more plumbing, financing issues, and outdated zoning rules can be tough to overcome. Only a few select office buildings are actually viable candidates for conversion to residential use.

“Office-to-multifamily (OTM) conversions is a popular topic in the media, but rare, and unlikely to impact the bottom line of either sector,” said CBRE in March 2023. “OTM conversions made up approximately 1% of multifamily deliveries over the past 20 years.”

What to Watch for Entering 2024

From a CRE office perspective, some factors will impact the marketplace over the coming year.

  • Dropping interest rates  Although mortgage rates came down in late 2023, they’re still higher than interest levels seen a few years ago. However, with the use of loan extensions, many owners will be able to continue with their current financing for another year or two. By then, perhaps, interest rates will fall still further.

In addition, many properties have significant cash flow even with higher vacancy rates. As Cushman & Wakefield explained at the beginning of 2023, “Although middle and low-quality office assets are under significant pressure and loan maturities will create pressure across all product types, it is worth noting that net operating income (NOI) is up considerably over the life of the average loan expiring over the next three years.”

  • Revitalization of downtowns  While worries about “urban doom loops” have been widely discussed, demand continues for quality properties. For example, downtown Minneapolis where KBS recently welcomed Fredrikson & Byron into 60 South Sixth, and in Chicago at KBS’ Accenture Tower, which went from pre-pandemic occupancy in the 70’s to being 98% leased today.
  • Forecasts are not set in stone  On the CBS news program 60 Minutes on February 4, 2024, Fed Chairman Jerome Powell was asked if the officials who set Fed rate policies had reached a rate cut consensus for 2024. In response, Powell said, “Almost all of the 19 participants who sit around this table believe that it will be appropriate in their most likely case for us to cut the federal funds rate this year.”

In other words, no, there was not a Fed rate-policy consensus even in early 2024, still another reason why today’s interest-rate projections and tomorrow’s realities may well be different.

  • There will be change  In his 60 Minutes interview, Powell also explained why U.S. economic policies will have to evolve. “In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don’t think that’s at all controversial. And I think we know that we have to get back on a sustainable fiscal path. And I think you’re starting to hear now from people in the elected branches who can make that happen. It’s time that we got back to that focus.”


If there has been a lesson from the past few years, it’s to expect caution from the Fed and to recognize that economic surprises are always possible — just look at the January employment report showing we added 353,000 new jobs. And while the Fed has hinted at cutting interest rates, the robust job market could keep their timetable in limbo as officials look for signs that inflation is reaching the 2% sweet spot — and not straying from the golden path that has proved so successful.

To learn more about the latest in commercial real estate, visit