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The Coming Regulatory Policy Modifications for CRE Workouts

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.

 

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.
 
According to a notice published in the Federal Register, the Office of the Comptroller of the Currency, Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration are debating a new policy statement. The change would modify a policy that was initially put into place in 2009 following the financial crisis of the time.
 
The announcement states “the agencies are proposing to update and expand the 2009 Statement by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses (proposed Statement).” The notification goes on, “In developing the proposed Statement, the agencies consulted with state bank and credit union regulators. If finalized, the proposed Statement would supersede the 2009 Statement for all supervised financial institutions.”
 
The focus of the proposed statement stresses the value of “working constructively with CRE borrowers who are experiencing financial difficulty and would be appropriate for all supervised financial institutions engaged in CRE lending that apply U.S. generally accepted accounting principles (GAAP)” and acknowledges that accommodations and workouts are frequently in the best interest of both parties.
 
Two important themes from the 2009 declaration continue to be supported by the statement, which is significant. One is that, even if the amended loans have flaws, a lending institution won’t face criticism for making a “prudent CRE loan accommodation.” The second is that because the value of the collateral is smaller than the loan total, the modified loans won’t be classified negatively as long as the borrower has the ability to repay under fair circumstances.
 
The suggested amendments would affect three areas. These arrangements are described as tools “to mitigate adverse effects on borrowers and would encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations during periods of financial stress” in a new section on short-term loan accommodations.
 
Secondly, beginning in 20009 there have been modifications to GAAP accounting, including CECL, or current anticipated credit losses. “In particular, the section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.”
 
The Financial Accounting Standards Board (FASB) “ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” is also mentioned. Financial institutions won’t be required to classify and account for loan modifications as troubled debt restructuring, once this standard is implemented.

Lasty, CRE exercise examples would be modified. “The examples in the proposed Statement are intended to illustrate the application of existing guidance on (1) credit classification, (2) determination of nonaccrual status, and (3) determination of TDR status.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

Even if demand declines, the industry will be able to survive because to limited multifamily building.

Despite worries about a recession, analysts believe that slower building will likely maintain a balance between supply and demand for multifamily housing for some time.
Three Moody’s economists argue in a recent analysis that “housing substitutability” can shift demand to the sector, so even if multifamily demand cools, restricted multifamily building will help preserve the sector. As the average property is currently approximately 44% more expensive than in 2019, would-be buyers of single-family houses are choosing to rent rather than buy, which in turn is boosting demand for multifamily units. The increase in short-term rates and their effects on mortgage rates are further exacerbating it, and Moody’s observes that there are already indications of markets cooling in several of the areas where prices rose most swiftly during the pandemic.
The Moody’s report states: “Although this may not lead to a widespread slashing of housing prices everywhere, housing price declines are a real possibility in the next few quarters or years depending on how severe and how long the next recession will be if there is one. Multifamily rents, on the other hand, are generally slower to respond to rising interest rates and remain more stable. If the substitutability within housing matches the Great Recession’s strength, then multifamily rents may remain elevated for some time until single-family housing stabilizes. Based on the past few recessions, the effect on multifamily performance may not begin until near or after a recession ends.”
The demand for multifamily housing is also likely to be sustained by low unemployment and a competitive labor market, which was not the case in prior recessions (as in the 1980s, when unemployment topped 9 percent ). However, while household balance sheets are usually doing better than they did during prior downturns, personal incomes with disposable cash are declining.
“As the multifamily and single-family home affordability crisis intensifies across more and more metros nationwide, this diminishing financial safety net is troubling, even for multifamily,” Moody’s notes. “Job losses or affordability issues could force some renters to find roommates or put off that move to single living.”
Strengthened financial regulations “may be a godsend” for multifamily, according to Moody’s analysts.
“Even if the Federal Reserve fails to engineer a soft landing this year or next, these rules will likely prevent the real estate market from sliding into a deep and long recession or suffering large aftershocks,” the trio wrote. “While many single-family markets will likely see small to moderate prices decline in this situation, multifamily’s positive performance should hold up relatively longer, as in previous downturns. Overall, in a mild recessionary environment, we would expect only a moderate vacancy rate increase and rent growth to simply decelerate. A slight and short-lived dip into negative territory towards the end of the recession is possible, but a free fall is highly unlikely.”
The SVN Vanguard team can help with your multifamily real estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

Experts say the cost of financing will keep rising to unprecedented levels.

The benchmark interest rate set by the Federal Reserve has increased by 75 basis points for a second consecutive month. The goal range for overnight interbank lending is 2.25 percent to 2.5 percent, and as it rises, so do many other interest rates, including those that commercial real estate companies will have to pay to get credit.
According to Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, “The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected.” The majority of market participants in commercial real estate are likely to have anticipated this, especially lenders as they have seen loan interest rates climb by more than 50 basis points in 2022, primarily in the second quarter. As a result, asset values are under pressure, and lender profits and borrower returns are constrained. Therefore, [as the industry evaluates the near-term future], [we predict] both loan issuance and commercial real estate sales volume to decline in Q2.

The Federal Open Market Committee of the Federal Reserve, which is tasked with containing both inflation and unemployment, justified its actions by highlighting recent steady job growth, high inflation, widespread pricing pressures, and Russia’s ongoing invasion of Ukraine.

 

Stephen Bittel, founder and chairman of Terranova Corporation, says there is a clear gap between expectations of buyers and sellers in our current investment climate. “..sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Bittel. He adds, “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”

Commercial real estate is already feeling the effects. According to Adil Hasan, director of real estate at Yieldstreet, “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed.” Hasan notes that, “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines.” He also argues that the,  “…rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”
Investors who made real estate purchases three years ago and are trying to roll over financing are getting one-year extensions from their lenders, according to Bill Doyle, co-founder and managing director at Equity Oak Ventures. Due to a significant decrease in appraiser valuation, he says,  “All forms of lenders, especially debt funds, are in need to rebalance those notes.” The continuing rate increases only put more pressure on the need to rebalance mortgages.  Experts note that in the debt market, the next 90-120 days will determine whether existing mortgages will need to be extended, refinanced,or ultimately handed back to lenders.
Some, however, do stand to benefit from the current state of the lending market.  Hasan points out that, “This could present some attractive acquisition opportunities for investors that have the capital available.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

These programs, which are provided by schools, universities, and business associations, are influencing the subsequent generation of CRE leaders.

People wishing to expand their skill sets within the commercial real estate market can now access a wide range of resources. Although they were not as common in the past, commercial real estate-specific degrees and certifications have become more and more popular in recent years. Young professionals with formal educations in commercial real estate are now more prevalent in the labor market.

According to Thomas Sherlock, a principal at Talonvest Capital, “Having a formal education in commercial real estate is an opportunity and advantage for anyone interested in a CRE career, For many individuals, that formal education provides the opportunity to start a career with a greater understanding of important fundamental factors in a variety of the industry’s interconnected specialties.”

While working in the industry, many seasoned experts are obtaining qualifications in commercial real estate.

At the Marshall Bennett Institute of Real Estate at Roosevelt University, Catherine Hughey is pursuing a Master of Science in Real Estate while also enrolling in two in-person evening courses. She also serves as general manager for JLL at the modern, 473,000 square foot 800 Fulton office skyscraper in Chicago’s Fulton Market. Hughey, a lifelong learner who graduated from Project REAP – Chicago in 2018, holds real estate broker licenses in Wisconsin and Illinois. She participates in both the BOMA/Chicago Diversity and Inclusion Committee and the JLL Midwest PM Diversity and Inclusion Committee.

Hughey declared, “You can’t lose. The Marshall Bennett Institute of Real Estate gives you all the tools you need to win, and all the instructors make the classes interesting.”
There are numerous reputable programs given by colleges, universities, and organizations that offer classes, real-life experience, practical knowledge, problem solving, group projects, and internship opportunities to match the career objectives of persons like Hughey. not to mention the intangible advantages like networking and mentoring. For instance, Chloe Asnes, a member of the George Washington University School of Business’s 2022 graduating class, says that the school’s real estate undergraduate concentration has a sizable and vibrant student body. “We are very fortunate to have engaged alumni who mentor students, help us expand our networks and provide us with technical training and interview prep,” according to the speaker.
These programs prepare the next generation of business executives for the opportunities and difficulties presented by commercial real estate by awarding a variety of degrees and certificates. The Advanced Management Development Program in Real Estate at Harvard University Graduate School of Design is where Sinobo Group’s director of asset management, Angela Han, is enrolled. She claims that the training is quite useful and covers a variety of topics in addition to only the high-level technology in buildings.“The program introduced the different standards that buildings can seek, LEED, WELL, etc., but also gave insight into the cost/benefit of which of these to pursue depending on the project you are working on. It also discussed the technological and practical overlap of different standards—some have more similarity, while others are very different. And the group discussion challenged us to think about the pros and cons of the different standards for our different projects.
For students who may not desire to pursue a university degree, there are other options. For instance, the CCIM designation is a demanding program of advanced study and training in financial and market analysis offered by the CCIM Institute. Students who want to receive the designation must enroll in classes, present a portfolio of relevant experience for review by a special committee, and pass a one-day exam. According to Karl Landreneau, a senior instructor at the CCIM Institute, “one of the biggest advantages of a CCIM Institute education is that all courses are taught by instructors who are CRE practitioners. The instructors are certified and trained, required to attend two adult education courses annually, and are also graded by their students.”
Another illustration is Project REAP, a diversity initiative for the commercial real estate sector that also provides an 8–10 week continuing education course on the fundamentals of real estate asset classes and its different functional disciplines, such as finance, leasing, property management, investment, brokerage, and development.
We are ready to assist investors. For questions about Commercial Real Estate for rent and Commercial Real Estate Listings, contact your Los Angeles commercial real estate advisors at SVN Vanguard.

Multifamily rent increases cost landlords.

Since the pandemic threw the status quo on its head and rattled it, multifamily has been one of the gleaming aspects of commercial real estate, along with industrial. Rent growth’s capacity to continue justifies lower cap rates and contributes to price increases.

But nothing can remain in one place for ever. The ordinary person still has a salary that trails inflation despite a strong employment market, according to research on multifamily rents. Additionally, when consumers pay more, they frequently expect something worthwhile in return.

The “2022 State of Resident Experience Management Report” from Zego came to that conclusion. The analysis stated that, “Renters are going to see increases for the foreseeable future, albeit, not at such drastic rates,”. According to projections made by the National Apartment Association, annual rent growth will continue to increase through 2022, albeit at a moderate rate of 6.3 percent to 7.0 percent.
Although the industry may use the phrase “moderate,” consumers are unlikely to. The rule of 70, a quick calculation for the time required to double a value accomplished by multiplying the percentage rate of increase into 70, makes the amount even bigger than it might appear. Given all other factors being equal and a 7 percent annual growth, someone renting an apartment for $1,500 a month would end up spending $3,000 in 2032.

The turnover cost is at what is probably a record level when people leave, such as when they relocate to a place that is more inexpensive for them or that they believe offers a value that is more in line with what they pay. Zego estimated that, compared to $3,850 in 2021, the average cost of promotion and marketing, unit maintenance, concessions, and missed rent will be $3,976.

It would take 17.6 months to repay the turnover costs if you increased the $1,500 unit’s rent by $225, or 15%. And as Zego pointed out, according to a Zumper poll, 81.6% of respondents planned to relocate in the following 12 months.

This leads to a vicious cycle. Customers demand even more with increased pricing and are more likely to leave if they don’t get what they want. People move, turnover costs are high, owners and management increase rents to try to cover the expense within a reasonable amount of time. Their online reviews also have an impact on future visitors to a location.
According to Zego, “modern living features” are the main factor in renters renewing their leases, while a lack of such elements is the main cause of their eviction. “Renters always want the best value for their money, particularly now when rent prices are at their peak. New and modern is not only attractive, but it signals that companies prioritize updating the community.” Which means investing in community façade, unit features, and building technology. The other choice is to spend money on turnovers.
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

Alternative assets are finally caught up by stock and bond repricings.

The fundamental tenet of Newtonian physics is that anything that ascends will eventually descend under the force of gravity unless it is caught by a soaring eagle. The Green Street Commercial Property Price Index indicates that, overall, this is what occurred to commercial real estate property prices in the second quarter of 2022.

The index, which is defined as a “time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate deals are currently being negotiated and contracted,” fell by 3.7 percent between May and June. 4.9 percent of the value has been lost overall from the peak point in March.

Overall, that is a 10% increase over the previous 12 months and a 10% increase since pre-covid periods.

Peter Rothemund, co-head of strategic research at Green Street, stated in prepared remarks that “the repricing that has occurred in bonds and stocks is finally evident in the commercial property market.Price discovery is still taking place, and economic uncertainty and interest rate volatility make that challenging, but prices of most properties are down 5%+ from recent highs. In a few sectors, pricing has held up better.”

By property type, performance varies considerably. Strip retail (down 7%) and net lease were the two worst-performing sectors between May and June (also down 7 percent ). Since before the pandemic, strip retail had increased by 7%, and in the past year while economies were recovering, it had increased by 15%. Before Covid, net lease saw a 6% growth and a 5% 12-month growth.

It’s interesting to note that the third highest decline, from May to June, was in the industrial sector, which has been particularly hot since the epidemic, growing at a rate of 42 percent and rising 15 percent over the past 12 months.

Manufactured home parks have done well generally, with a 17 percent growth over the past 12 months, up 33 percent prior to Covid, and no loss between May and June, despite general stresses on the availability and cost of rental accommodation.

Another industry that has fared well in the face of economic and societal pressures is self-storage, which has grown by 58 percent since before Covid, by 28 percent over the past 12 months, and by a lower-than-average 4 percent during the most recent recorded month.

Office decreased by only 4% in the most recent month, but was down 1% over the previous 12 months and -9% since before the epidemic. Consequently, the net result is negative.

Multifamily has increased by 15% over the past 12 months and by 16% since before the epidemic, although it has decreased by 4% during the past month.

After the sharp rise in prices in so many categories over the previous two years, it was fair to wonder how much higher prices, as well as rents paid by consumers and businesses, could rise. There were numerous indications that price growth was beginning to slow down.

Housing prices have started to decline, but the lack of available inventory has prevented a collapse, and investor purchases of SFR are rising. Over the next six months, CoStar anticipates a decline in demand for multifamily housing.
We are ready to assist investors. For questions about Commercial Real Estate for sale and Commercial Real Estate Listings contact your Los Angeles commercial real estate advisors at SVN Vanguard.

1. Jobs Report

2. Inflation and Inflation Expectations

3. Beige Book

4. NMHC Construction Survey

5. CMBS Delinquencies

6. Gas Prices

7. Office Demand

8. GDPNow Predicts Recession

9. The Hot Market for Cold Storage

10. Apartment Development Risks

 

SUMMARY OF SOURCES

1. CONSUMER PRICE INDEX

2. CONSUMER SENTIMENT

3. LOGISTICS MANAGERS INDEX

4. MBA MORTGAGE APPLICATIONS

5. WORKPLACE OCCUPANCY

6. TECH WORKERS AND REMOTE WORK

7. CONSTRUCTION SPENDING

8. YIELD CURVE AND PREDICTED GDP GROWTH

9. SPECIAL SERVICING RATES

10. CMBS DELINQUENCIES

 

SUMMARY OF SOURCES

1. CONSUMER PRICE INDEX

2. APRIL JOBS REPORT

3. INTEREST RATES AND YIELD CURVES

4. EY WORK REIMAGINED SURVEY

5. COMMERCIAL AND MULTIFAMILY ORIGINATIONS

6. EVICTIONS

7. STOCK MARKET VOLATILITY

8. NMHC APARTMENT SURVEY

9. NAIOP CRE SENTIMENT INDEX

10. NY FEDERAL RESERVE HOUSING SURVEY

 

SUMMARY OF SOURCES

National Overview

OFFICE

As the pandemic sent corporate America from boardrooms to bedrooms in 2020, long-held assumptions about productivity are now rightfully up for debate. On one side of the spectrum are those that argue that office spaces facilitate an agglomeration of ideas, culture, and productive output. On the other hand, many argue that long commutes into places of work are outdated norms, and the commute time saved by remote work can generate both greater worker productivity and improved quality of life — a classic case of having the cake and eating it too. Now, with 2021 in the rearview, and after two distinct COVID waves derailed back-to-office timelines, there has been little resolution to the so-called big questions from a year ago.

According to The Pew Research Center, as of January 2022, for American adults who report being able to complete their jobs from home, 59% are doing so most or all of the time, and 18% do so some of the time. The VTS Office Index (VODI), which measures new Office leasing demand, remained down by 42% relative to its pre-pandemic benchmark through the end of 2021. As the public health threat lessens, these data will undoubtedly improve, but the question is by how much. In a tight labor market, the desires of workers can quickly transition into leverageable demands.

According to Morning Consult’s tracking of remote workers, 84% have enjoyed being remote, 79% feel they are more productive working remotely, and 76% would be more likely to apply for a job that offers remote work.1

SVN® Product Council Office Chair Justin Horwitz notes that “arguably, Office properties were the most negatively impacted of all the product types as a result of the pandemic.” However, he holds that 2021 was a year of recovery as sales volumes came back to peak levels thanks to returning “investor demand for quality office buildings, […] particularly for well-stabilized assets in strong locations.”

In their Q4 2021 report, Moody’s Analytics REIS attests that while the stage was set for Office sector distress in 2021, the incoming performance data failed to show it.2 Effective rent growth remained negative to begin last year but had returned to growth by the third quarter. Through Q4 2021, of the 82 markets that Reis tracks, 59 had positive absorption, 53 had improving occupancy, and 61 saw improving rent growth — a stark contrast from one year ago.

The open questions over the workplace of the future and its role in our daily lives appear most pertinent to Gateway markets such as New York. According to New York’s MTA, ridership of NYC’s subway system is forecast to be a long way off pre-pandemic ridership levels through 2025.3 Moreover, many of its stations seeing the largest declines in ridership are in Central Business Districts (CBDs) such as Midtown and Manhattan’s downtown Financial District.

Outside of Gateway markets, the picture on the horizon appears a bit rosier. According to a Chandan Economics analysis of Real Capital Analytics data, Suburban Office valuations continue to soar. Over the past three years, the relative price per square foot premium an Office sector investor would have to pay for a CBD asset over a Suburban asset shrank from 79% to just 49%. Mr. Horwitz notes that “suburban markets are the beneficiary of businesses adjusting to the “new normal.”

 

Financial Performance

TRANSACTION VOLUME

Transaction volumes for Office assets saw considerable improvement in 2021. According to Real Capital Analytics, more than $139 billion of asset value traded hands last year, a 56.5% improvement over 2020’s total. Still, despite the improvement, the Office sector was the only major CRE property type that did not eclipse its 2019 peak in 2021, as transaction volumes fell about $5 billion short.4 While the resumption of strong trading volumes is encouraging, the apparent lack of pent-up demand that has been observed in other property types may signal continued concern for the sector as hybrid work figures to be a market-shaping force for years to come.

CAP RATES AND PRICING

Cap rates for Office properties declined steadily throughout 2021, finishing the year with a sector average of 6.2% — down 31 bps year-over-year.5 Suburban Office assets continued their bull run in 2021 as pandemic-induced migration patterns and remote work adoption has proven broadly supportive of suburban commercial real estate at the expense of central cities, especially in Gateway markets. Last year, cap rates for suburban Office assets sank by 38 bps, settling at 6.3%.6 As recently as mid-2019, the cap rate spread between suburban and Central

Business District located Office assets stood as high as 147 bps.7 Through Q4 2021, this spread has fallen to just 55 bps.8 Medical Office assets also saw significant cap rate compression last year, declining 38 bps to 5.9%.9 Meanwhile, Single Tenant Office assets saw cap rates fall by just 4 bps, landing at 6.5%. Central Business District Office assets, the most maligned property group in the sector, saw cap rates rise by 18 bps in 2021, settling at 5.8%.10

Prices for Office assets finished 2021 up an average of 6.1% from the year earlier. Single Tenant Office assets were the clear laggard of the group, as prices increased by just 5.4% year-over-year through Q4 2021. CBD assets followed next with annual price appreciation rates of 10.4%. Again, Suburban and Medical Office properties were the clear winners in 2021, as prices grew an average of 15.1% and 15.5%, respectively.

 

Markets Making Headlines

TERTIARY WESTERN MARKETS ON THE RISE

The major Office success stories throughout the pandemic have come from outside of the traditional globalized markets like New York, San Francisco, and Los Angeles. Instead, outflowing residents and businesses from the traditional hubs into tertiary alternatives has generated momentum for a number of well-positioned smaller cities.

Nevada continues to be a standout in this area. Las Vegas seemingly has gleaned lessons from the Great Recession, and over the past decade, it has made significant progress in diversifying its labor market. Las Vegas led all other metros for the largest gains in Office sector property valuations last year (+13.2%), according to CoStar. For nearby Reno, it is a similar story. The rising competitiveness of Reno saw its Office sector post the nation’s third-biggest jump in rents (+4.9%) and the fourth largest jump in occupancy rates (+1.6%) last year.11 The Economic Development Authority of Western Nevada credits Reno’s recent success to a decade-long labor diversification plan adopted in Washoe County.12 Reno’s unemployment rate sat at a rock bottom 2.8% at the end of 2021 — 1.1 percentage points better than the national average.13

Moving beyond Nevada, several other secondary cities in the West continue to see their stock rise. San Diego posted a sizable jump in Office space net absorption totals in Q4 2021, coming in at 648,414 square feet, surging from just 2,913 square feet in the same period the year prior.14 Colorado Springs, CO, stands as a rare example of a metro where there are more employees today (310k) than there were entering the pandemic (305k).15 According to CoStar, the relatively small Colorado city posted the fifth biggest jump in Office sector valuations last year, rising a healthy 8.8%.16

In Spokane, WA, short-term headaches created by the pandemic are pitted against long-term improving fundamentals. According to Guy Byrd of SVN | Cornerstone, “Spokane’s CBD has been the weakest performing market in the last year as a significant number of tenants are choosing the increasingly popular hybrid work model.” He goes on to cite that “recruiting top talent and providing attractive work environments for workers who now prefer remote work is a significant new challenge.” Still, Washington State anticipates that Spokane will be a site for significant growth in the years ahead. While Spokane County is home to just over half a million people, the State’s Office of Financial Management projects that its resident population will swell by another 90k by the year 2040.17 Despite the ongoing headwinds, Mr. Byrd notes that vacancy rates improved last year as “users were forced to reinvent the most effective office environment.” Moreover, sales volumes also ticked up in 2021 “due to low interest rates and minimal new office construction,” a trend that forecasts should carry into 2022, “subject to economic conditions vital to the market.”

 

THE UNRETIREMENT COMMUNITY

Success begets success. Florida saw its population grow by 211k people in 2021 — more than every state not named Texas.18 With the influx of new residents, there is increased demand throughout all verticals of commercial real estate. After all, these incoming residents need places to live, places to shop, and places to work. Florida’s Office markets, including in suburban settings, saw statewide success in 2021.

Fort Myers, a smaller Office sector compared to Florida’s more developed alternatives, has seen demand far outpace supply as it currently boasts the highest market-level occupancy rate (95.5%) in the country.19 Moreover, between the end of 2020 and the end of 2021, the Office occupancy rate rose by the second-highest clip in the country, growing by 1.8 percentage points.20

According to SVN | Commercial Advisory Group’s Larry Starr, Sarasota is “boasting some of the strongest office rent growth in the country,” a claim that is backed up by CoStar data, which shows rents in the area growing by 5.3% last year.21 “Office demand has remained strong in Sarasota throughout 2021, pushing vacancies to new lows.” In Tampa, a metro that has seen as much commercial real estate success as sporting success over the past half-decade, saw firming demand last year. Mr. Starr notes that Tampa remained a standout as “both asking rents and office demand improved throughout 2021, significantly outperforming the National Index.” Mr. Starr does see the potential for some softness in 2022, suggesting that Tampa’s office sector will be “challenged due to the increase in the amount of space available on the market,” as the pandemic triggered “the largest supply wave in over a decade.” Still, he sees the rising profile of Tampa and its ability to attract re-locating businesses as broadly supportive of the city’s long-term fundamentals, citing that “office investment activity has sharply increased with annual sales volume roughly doubling 2020 levels.”

 

Macro Economy

ECONOMIC GROWTH

The US economy has experienced a robust recovery from the initial shock of COVID-19. A pandemic-driven shift in consumption away from services and into goods, boosted by a sweeping stimulus effort, reconditioned our economy well before an off-ramp from the public health crisis was in sight. By Q3 2020, inflation-adjusted GDP shrugged off its worst quarterly performance on record to record its best, a 33.4% annualized growth rate.1 In 2021, the total nominal value of all consumption and production reached $23.0 trillion, a 9.1% increase above 2020’s total and 6.9% above 2019’s total. After adjusting for inflation, the US economy is 3.2% larger than its pre-pandemic peak.2

The foundation of the economy’s rebound has been a swift labor market recovery. At its April 2020 peak, the official unemployment total reached a staggering 23 million people.3 By the start of 2021, the unemployment total had improved to just 10.1 million people out of work.4 Over the past year, this level has come down to 6.5 million people, less than one million above the pre-pandemic level of 5.7 million.5

 

INFLATION & MONETARY POLICY

One year ago, the market consensus was that the Federal Open Market Committee (FOMC) would not begin a monetary policy tightening cycle until 2023. However, as demand surges in the face of gummed-up supply chains, rampant inflation has emerged at center stage, forcing shifting guidance from policymakers.

After decades of tepid price increases, in January 2022, the Consumer Price Index (CPI) reached 7.5%, a level not seen in 40 years.6 Core-PCE, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, reached 5.2% in January, prompting the FOMC to be increasingly committed to an interest-rate hike at its March 2022 meeting.7 In just 24 months, policymakers at the Federal Reserve have repositioned themselves from a tighter monetary policy stance into an accommodative one and back to a tightening one. According to the CME Fed Watch Tool, as of February 23rd, future markets are forecasting seven rate hikes by the end of the year — a sizable shift from even just one month earlier, when future markets were forecasting just four rate hikes in 2022. Volatile swings in the medium-term outlook are symptomatic of the rapid shifts in economic activity that categorized the past two years.

In December, Fed officials looked on cautiously at the near-term outlook as Omicron emerged as a roadblock to economic normalcy. After the Delta variant led to declining activity and sluggish job growth in mid-to-late summer 2021, some officials worried that Omicron, a more transmissible variant of COVID compared to previous waves, would hinder the recovery. While a significant wave of US cases followed, the Omicron wave proved to be less deadly and less straining on the US public health system than previous ones. As a result, an increasing number of US states and municipalities are relaxing masking and vaccine restrictions. On February 25th, the CDC introduced a new slate of guidelines that experts say shifts the US into the “endemic phase” of the pandemic. The new guidelines would put more than half of US counties and over 70% of the population in “low” or “medium” risk designations, bolstering the FOMC’s willingness to remove accommodative monetary policies.

THE GREY AREAS

Still, a measurable dose of uncertainty overhangs stock markets and the whole macroeconomy. The VIX, a volatility index captured by the Chicago Board Options Exchange, has remained stubbornly elevated since the onset of the pandemic. Despite moderately retracting during the fall of 2021, the annual average for the VIX in 2021 was 19.7, 27.7% above its 2019 average.8

The SVN Vanguard team can help with your office real estate needs. We can help you find the ideal office property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

 

NATIONAL OVERVIEW SOURCES

  1. Morning Consult, as of February 26th, 2022.
  2. Moody’s Analytics REIS, report found here: https://cre.moodysanalytics.com/insights/cre-trends/q4-2021-office-first-glance/
  3. https://www.osc.state.ny.us/files/reports/osdc/pdf/report-10-2022.pdf
  4. Real Capital Analytics; Through Q4 2021
  5. Real Capital Analytics; Through Q4 2021
  6. Real Capital Analytics; Through Q4 2021
  7. Real Capital Analytics; Throughout Q4 2021
  8. Real Capital Analytics; Throughout Q4 2021
  9. Real Capital Analytics; Throughout Q4 2021
  10. Real Capital Analytics; Throughout Q4 2021
  11. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
  12. https://knpr.org/knpr/2022-02/northern-nevadas-economic-diversification-helped-soften-impact-pandemic-can-southern
  13. Bureau of Labor Statistics
  14. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
  15. Bureau of Labor Statistics; Through December 2021
  16. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
  17. https://www.krem.com/article/money/economy/boomtown-inland-northwest/spokane-county-future-growth/293-6859dcc0-bd63-40ef-8f16-c483fa61c9e1
  18. US Census Bureau
  19. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
  20. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
  21. CoStar; Through Q4 2021. Note: Measured across the top-100 markets

 

MACRO ECONOMY SECTION SOURCES

  1. US Bureau Economic Analysis

  2. US Bureau Economic Analysis

  3. US Bureau Labor Statistics

  4. US Bureau Labor Statistics

  5. US Bureau Labor Statistics

  6. US Bureau Labor Statistics

  7. US Bureau of Economic Analysis

  8. Chicago Board Options Exchange



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