4 Weak Spots in the Current Market

Today's uncertain economic climate is putting particular pressure on four market segments. Here's what to watch out for in the months ahead.

A one-two punch of persistent inflation and high-interest rates is creating pockets of weakness across the investment universe.

We polled Schwab experts for their views on which segments of the market look most vulnerable—and what steps investors can take to minimize their exposure, and maybe even profit if the opportunity presents itself.

Commercial real estate

What's the matter: According to the Pew Research Center, more than a third of U.S. workers who can work from home now do so full time. As a result, between the end of 2019 and the beginning of 2023, the office vacancy rates in New York and San Francisco alone increased 14.2% and 19.8%, respectively. By 2030, more than 300 million square feet of U.S. office space is expected to be obsolete.

On the financing side, nearly $900 billion in U.S. commercial property debt is set to mature this year and next. Property owners will almost certainly face higher rates, and those who can't afford to refinance will be forced to inject millions of dollars in fresh capital, sell, or simply walk away. "This isn't something that gets solved over the next couple of years," says Kevin Gordon, senior investment strategist at Schwab.

What to do about it: Commercial real estate is a broad category, so to say the entire sector is struggling is an overstatement. "Much of the stress in the sector is around office space, and you can boil down the issues to a handful of big cities," Kevin says. "As an investor, you have to consider the fuller picture."

In fact, parts of the market are holding up nicely, thank you very much. Student housing is one such area. Rents are growing by about 9% because of limited supply and strong demand at many colleges. The data centers that are key to the cloud computing and artificial intelligence industries are another bright spot. In the seven main U.S. data center markets, leasing rose 40% between March 2022 and March 2023, while vacancies fell to a record low of 3.2%.

Despite these areas of strength, Kevin suggests sticking to higher-quality stock investments—such as those with low debt and strong cash flow—amid the uncertainty.