1. CPI INFLATION

• The Consumer Price Index (CPI) rose 3.2% from one year ago, roughly in line with last month’s increase and climbing just 0.2% month-over-month.
• Core prices, which exclude food and energy rose 4.7% year-over-year, the lowest annual increase since October 2021. Core prices also rose just 0.2% from the month prior — a signal that inflation pressures continue to ease across the US economy gradually.
• Shelter costs continue to be the primary catalyst behind rising price pressures, increasing 0.4% month-over-month and 7.7% over the past 12 months.
• Food prices aligned with headline inflation during July, rising 0.2% from June.
• Despite a spike in crude oil prices in July, energy prices rose just 0.1% month-over-month.
• Real wages, which adjust wage increases for inflation, rose 0.3% in July and are up 1.1% over the past 12 months. The rise in real wages signals that Americans’ incomes are starting to catch up — reversing some of the inflationary erosion in consumer purchasing power.

2. JULY JOBS REPORT

• The US economy added 187k jobs in July, while the unemployment rate remained little changed at 3.5%. July’s level registered below the Dow Jones estimate of 200k job adds.
• July’s job growth was slightly above June’s level of 105k job adds but remained well below its postpandemic trend. The job growth levels in June and July are the lowest monthly increases since December 2020.
• Average hourly earnings rose 0.4% during the month and have climbed by 4.4% over the past year. The monthly and annual wage increases exceeded consensus estimates, while a slowdown in inflation led to a significant monthly increase in real wages.
• Labor force participation had held steady at 62.6% for the past five months.
• Stocks reacted positively to the jobs report since, despite falling job growth, the gradual nature of the labor market’s slowdown alongside steady unemployment and labor force participation levels signal a “soft landing” for the US economy.

3. HOUSEHOLD DEBT

• Consumer debt rose to a record level during the second quarter of 2023, climbing to $17.06 trillion, according to the New York Fed.
• Credit card balances are up 4.6% quarter-over-quarter, rising by $45 billion to $1.03 trillion in the second quarter. Steady consumer spending levels are being amplified by inflation pressures, partially explaining the sharp increases.
• Meanwhile, mortgage debt remained relatively stable compared to the start of the year, coming in at $12.01 trillion at the end of Q2. These data largely reflect a slowdown in new mortgage originations and refinance applications, which have fallen in 2023 due to rising interest rates. Mortgage debt accounts for roughly 70% of America’s total debt load.
• In a worrying sign, the four-quarter average for credit card delinquencies rose to an 11-year high, a potential sign of an upcoming slowdown in consumer spending levels.

4. INTEREST RATE PROJECTIONS

• According to the Chicago Mercantile Exchange’s Fed Watch Tool, Fed Funds futures forecast a 90.5% chance of a pause in rate increases when the FOMC meets at its next meeting in September.
• Forecasts were bolstered in recent days after the July CPI report revealed that US inflation pressures continue to soften monthly and annually. One week prior, futures markets were pricing in a less certain 82.0% chance of a pause, which itself was bolstered by a positive July jobs report.
• The Federal Reserve initially paused rate increases in June as it looked to glean signals about the health of the US economy from upcoming data, then enacted a 25 basis points increase in July to help reaffirm inflation expectations. The most recent projections from futures markets reflect a belief that the Fed’s
  data-dependent approach could incentivize a pause as macroeconomic measures point to a softer landing than many had expected.

5. MORTGAGE RATES

• According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage rose to 6.96%, the highest rate since November 2022.
• The rise in mortgage rates follows the recent downgrade of the US credit rating alongside a 25 basis points increase in the benchmark federal funds rate by the FOMC in July.
• Housing demand remains relatively strong in the face of higher mortgage rates, with supply remaining tight due to the tepid seller’s market, incentivizing many would-be sellers to hold onto their assets until the market environment is more favorable.
• Notably, as mortgage rates reached 7.0% in late 2022, housing market activity slowed, a potential signal for what may be ahead in the coming weeks.

6. CREDIT RATING DOWNGRADE

• On August 1st, rating agency Fitch downgraded the US long-term credit rating to AA+ from AAA, reflecting growing government debt, a perceived fiscal deterioration over the next three years, and the “erosion” of governance stemming from the latest debt ceiling standoff.
• On erosion of governance, Fitch notes a “steady deterioration” of fiscal responsibility over the last 20 years, citing repeated political standoffs and last-minute resolutions. Further, it critiques the US’ lack of a medium-term fiscal framework, citing the complexity of the congressional budget process. The agency
  also notes the impact of debt increases and a failure to address medium-term challenges to entitlement programs.
• More specifically on debt, Fitch notes that while the debt-to-GDP ratio has fallen from a 2020 high of 122.3%, it remained uncomfortably above pre-pandemic levels, which sat at 100.1% in 2019. The agency projects that the US debt-to-GDP ratio will continue to rise in the coming years and may make the US vulnerable to future economic shocks.

7. THE FUTURE OF CITIES

• The debate around the future of cities gained substantial intrigue during the COVID-19 pandemic. Still, experts from universities across the country have recently opined that amenities and “unique attractions” are likely to keep demand for urban living high in the long term.
• According to Nicholas Bloom of Stanford, who conducts remote work research, the 12 biggest cities collectively lost about two-thirds of a million residents from city centers during the pandemic. About 60% of those who left moved to nearby suburbs, relatively in line with historical trends. However, relatively few people abandoned urban life altogether, according to Bloom, while urban densification returned to similar levels as in 2010.
• Since 2021, population losses in the 12 largest cities have slowed, with many showing signs of gains. While remote work remains prevalent, fewer residents are using it as an opportunity to move to the suburbs than during the early years of the pandemic.
• Other experts expressed their view that downtowns and central business districts must evolve beyond office spaces to survive. Many expect city centers to become more amenity-focused with diverse revenue streams. In contrast, smaller cities could benefit from remote work as people seek more affordable options with good quality of life.

8. INDUSTRIAL SECTOR FUNDAMENTALS

• A new analysis by Colliers suggests that while fundamentals have softened in the Industrial sector, the fall in demand will likely not be enough to reasonably shift the landlord-favorable environment that exists in the space today.\
• According to the analysis, with a vacancy rate hovering close to 5%, lease rates should continue to climb at a slower but positive pace, remaining favorable to those holding the asset.
• Further, the revival of US manufacturing is expected to produce logistical advantages for businesses and investors, boosting the Industrial sector’s longer-run fundamentals.
• During the second quarter of 2023, the supply of projects under construction fell by 3.4% as interest-rate increases temporarily halted some projects. The construction slowdown will also help operating incomes on existing properties in the short term.

9. HOTEL TO MULTIFAMILY CONVERSIONS

• As Lodging delinquencies rise in some metros, some areas have considered hotel-to-multifamily conversions to reduce property vacancies and prevent a significant decline in values.
• In New York City, where the industry has seen some success with such conversions, the Lodging delinquency rate stands at 15.3%, according to Trepp. Further, New York’s insufficient supply of affordable housing units has made the potential for such conversions more favorable compared to less housing constrained metros.
• Larger metros also continue to experience higher Lodging delinquencies, making them riper for such conversions compared to smaller cities. Houston and Chicago have contributed the most to Lodging delinquencies, with rates of 43.8% and 38.6%, respectively.

10. FORECLOSURES FALL

• According to ATTOM’s monthly Foreclosure Activity Report, foreclosure filings are down 9% from June, with a total of 31,877 properties entering foreclosure in July.
• According to the report, the decline in filings reflects a rebounding housing market, with home prices experiencing a similar turnaround during July. Still, with various factors at play, including an uncertain interest rate outlook, the foreclosure activity may continue to be volatile over the next several months.
• The states with the highest monthly increases in foreclosure rates were Maryland, New Jersey, Delaware, Illinois, and South Carolina. Hawaii, New Hampshire, Idaho, Arkansas, and Alabama saw the most significant monthly declines in July.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/cpi/
• (2) https://www.bls.gov/news.release/empsit.nr0.htm
• (3) https://www.newyorkfed.org/newsevents/news/research/2023/20230808
• (4) https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
• (5) https://www.freddiemac.com/?gad=1&gclid=Cj0KCQjwldKmBhCCARIsAP-0rfxtsUBsZIG2h19jzblxT014cZHeZchVdUT9jlJyE9lOuSPri60whUaAnPcEALw_wcB
• (6) https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-termratings-to-aa-from-aaa-outlook-stable-01-08-2023
• (7) https://www.pewresearch.org/short-reads/2023/08/02/majority-of-americans-prefer-acommunity-with-big-houses-even-if-local-amenities-are-farther-away/sr_2023-08-02_big-houses_2/
• (8) https://www.globest.com/2023/08/10/heres-why-industrial-will-stay-a-landlords-market/
• (9) https://www.trepp.com/trepptalk/revitalizing-real-estate-converting-underperforming-hotels-intomultifamily-units
• (10) https://www.attomdata.com/news/market-trends/foreclosures/attom-july-2023-u-s-foreclosuremarket-report/

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing on Buying or Leasing Office Space? Contact us.

The average annual increase was 13.6%, while certain locations saw higher increases.

1. INFLATION

• The consumer price index (CPI) rose by 0.2% month-over-month and 3.0% year-over-year through June, according to the latest numbers from the Bureau of Labor Statistics. June’s monthly pace was a slightly uptick from May, but inflation continued to trend down on an annual basis.
• Shelter remains the largest contributor to month-over-month price increases, accounting for roughly 70% of the increase. Food prices rose 0.1% in June, 10 basis points below the previous month’s rate—this was mostly driven by the ‘food away from home’ index, which rose 0.4% in June, while food at home saw no change. Energy prices rose 0.6% in June but have fallen -16.7% over the past 12 months.
• Excluding food and energy, core inflation also rose 0.2% in June, but was the smallest 1-month increase in core prices since the summer of 2021. Since core-inflation is more consequential in central bank policymaking, the core-CPI’s two-year low represents a significant milestone.

2. CONSUMER INFLATION EXPECTATIONS

• Inflation expectations by US consumers for the next 12 months fell for the third consecutive month in June to 3.8%, its lowest since April 2021, according to the New York Fed.
• Consumer inflation expectations have gradually fallen from a June 2022 high of 6.8%, and June’s downtick follows a year-ahead expectation of 4.1% in May.
• Expected price changes for gas declined 40 basis points to 4.7%. Expected price changes for food fell 10 basis points to 5.3%.
• Several other sub-components saw a modest rise in year-ahead expected price changes. For college education, inflation expectations rose 1.2 percentage points to 8.3%, expected price changes for medical services rose by 10 basis points to 9.3%, and expected price changes for rent rose 30 basis points to 9.4%. Similarly, home price growth expectations rose for the fifth consecutive month to 2.9%, its highest reading since July of 2022.
• The median three-year-ahead inflation expectation remained unchanged at 3% but rose for the five-year horizon, jumping 30 basis points to 3%, its highest reading since March 2022.

3. FOMC MEETING MINUTES

• According to the most recent meeting minutes from the FOMC’s June meeting, most officials expect further tightening in the future, but anticipate a slower pace of rate increases compared to the past year.
• Last month, concerns by several officials over the outlook for economic growth led to the decision to hold rates steady—its first non-hike decision since February of 2022. While those officials were concerned, many remained committed to future hikes if necessary. In their words, the decision to pause was to allow more time to evaluate progress toward the Fed’s goals of maximum employment and price stability.
• Despite the unanimous decision not to raise rates, the minutes revealed the disagreement among members, with several advocating for higher rates due to elevated inflation, while others emphasized the need to pause and observe the effects of a year-plus of tightening.
• Additionally, while the pause was a unanimous decision, participants on average project at least one additional hike this year, with a majority anticipating two or more.

4. JUNE JOBS REPORT

• The US added 209,000 new jobs in June while the unemployment rate ticked down slightly to 3.7%, according to the Bureau of Labor Statistics.
• Job growth continues to hold firm despite fears about higher interest rates, slowing spending and investment, and layoffs across many industries. Employment continues to trend positively in key sectors, with the largest increases seen in government (+60,000), health care (+41,000), social assistance (+18,000), and construction (+23,000).
• Payroll growth has certainly slowed in 2023, averaging 270,000 new jobs per month over the first half of the year compared to a pace of 399,000 per month in 2022. Still, despite post-COVID era inflation, and an aggressive monetary tightening cycle that has been used to combat it, the unemployment rate sits just 30 basis points above its March 2020 level.

5. JOLTS

• Job openings decreased to 9.8 million on the last business day in May, 496,000 positions below the April rate, according to the latest Job Openings and Labor Turnover Survey (JOLTS) by the Bureau of Labor Statistics. Declines were concentrated in sectors like health care, finance, and other services.
• Hires remained steady at 6.2 million, with notable increases in the durable goods manufacturing sectors.
• Total separations, which includes quits, layoffs, and discharges, were little changed in May at 5.9 million. Meanwhile, quits increased to 4.0 million. Layoffs and discharges remained stable at 1.6 million. There was a notable increase in layoffs and discharges in the retail trade sector, which climbed by +87,000.

6. NFIB BUSINESS OPTIMISM INDEX

• Small business optimism reached a seven-month high of 91 in June according to the latest data from the National Federation of Independent Businesses. The reading beat market expectations of 89.9.
• 24% of owners report that inflation remained their single most important issue in operating their business, down just one point from May. Nonetheless, only a net 29% of business owners reported higher selling prices compared to the previous month, the smallest proportion since March 2021.
• Further, fewer owners are viewing the near future pessimistically. According to the report, the percentage of firms expecting worst business conditions over the next six months, which moved from a net -50 to a net -40. There were also fewer firms reporting difficulty filling job openings.

7. HOUSECANARY MARKET PULSE

• Closed prices continue to climb despite the apparent peak in list prices, according to the latest Market Pulse report from HouseCanary. Price cuts have fallen well below their peak in 2022, and year-over-year growth is positive through June 2023.
• However, net new listings remain significantly down this year. In June, 264,032 net new listings were placed on the market according to HouseCanary’s data, which amounts to a 35.5% decrease compared to June 2022. Over the last 52 weeks, roughly 2.52 million new listings have been placed on market, representing a 26.7% fall compared to the 52 weeks before.
• According to the report’s analysts, market watchers should expect activity to remain at relatively low level through Q3 2023 as the Fed appears poised to continue rate increase through the end of the year.

8. HOME AFFORDABILITY

• The median-priced single-family home/condo became less affordable during the second quarter of 2023 compared to historical averages, according to the latest US Home Affordability Report from ATTOM.
• This continues a pattern dating back to early 2022, with the most recent report showing that affordability has worsened in the face of recent jumps in home prices. According to ATTOM, the common debt-to-income ratio that is considered “affordable” is 28%. The latest reading showed that the average homeowner would need to contribute 33% of their wages to major homeownership expenses.
• The Q2 2023 level is the highest since 2007 and remains significantly above the 25% that was registered just after mortgage rates took off in early 2022.

9. FORECLOSURE ACTIVITY

• Foreclosure filings are up 13% during the first six months of 2023 compared to the same period last year, according to the latest Foreclosure Activity Report from ATTOM.
• There were roughly 186,000 foreclosure filings between January and June, which in addition to the doubledigit uptick over the first half of 2022, is 185% above the same period in 2021, gradually approaching prepandemic levels.
• The greatest increases in foreclosure activity by state, compared to one year ago, were Maryland (+100%), Oregon (+99%), Alaska (+65%), West Virginia (+83%), and Arkansas (+72%). However, the highest total foreclosure rates by state are in Illinois (0.25% of units with a filing), New Jersey (0.24%) and Maryland
  (0.23%).

10. LOGISTICS MANAGERS’ INDEX

• The Logistics Managers’ Index (LMI), a diffusion index where above 50 signals expansion in transportation and warehousing activity and below 50 is a contraction, fell for a fifth consecutive month to a record low of 45.6 in June.
• The fall represents a contraction in the logistics sector, which is primarily driven by falling inventories, according to the report. Inventories fell in June to their second-lowest reading on record, while inventory costs also fell.
• Declining inventories are predicably impacting the supply of warehouse space, with warehouse capacity climbing over the month. However, demand doesn’t appear to be falling, with both warehouse utilization and warehouse prices increasing.
• Transportation utilization also rose slightly in June, while transportation prices fell, but at a slower rate than in recent months.
• Respondents appear optimistic about the chances of a turnaround in the next month, with the average forecast predicting an expansion rate of 55.4% over the next year.

SUMMARY OF SOURCES

•  (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (2) https://www.newyorkfed.org/microeconomics/sce#/
• (3) https://www.federalreserve.gov/monetarypolicy/fomcminutes20230614.htm
• (5) https://bls.gov/news.release/jolts.nr0.htm
• (6) https://www.nfib.com/content/press-release/economy/small-businesses-raising-prices-falls-tolowest-level-since-march-2021/
• (7) https://www.housecanary.com/wp-content/uploads/2023/07/Market-Pulse-Report-57.pdf
• (8) https://www.attomdata.com/news/market-trends/home-sales-prices/attom-q2-2023-u-s-homeaffordability-report/
• (9) https://www.attomdata.com/news/market-trends/foreclosures/attom-mid-year-2023-u-sforeclosure-market-report/
• (10) https://www.the-lmi.com/

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing on Buying or Leasing Office Space? Contact us.

1. FED INTEREST RATE DECISION

• On June 14th, The Federal Reserve announced a pause in interest-rate increases as it assesses the effects of its tightening efforts on the economy, holding the target federal funds rate at 5.0-5.25% while signaling the likelihood of further rate hikes this year.
• The decision was unanimous and followed ten consecutive rate-hikes dating back 15 months to March 2022 as the central bank attempted to get spiraling inflation under control.
• May’s Consumer Price Index (CPI) report showed falling headline inflation numbers, with prices climbing just 0.1% month-over-month and 4.0% year-over-year, its smallest annual increase in over two years. Futures markets were forecasting a rate pause before the release of CPI data, but May’s numbers likely reinforced the Fed’s decision.
• The Fed’s Summary of Economic Projections reveals that despite the pause, policymakers have pushed their expectations of the terminal interest rate further out, with the median forecast projecting a 5.6% federal funds rate by the end of 2023.
• Markets climbed on the news and largely shrugged off worries over future increases while fed futures continue to project a rate-cut later this year. Market reactions signal that investors aren’t entirely convinced of the Fed’s hawkish stance and that the Fed funds rate may have peaked. Officials have said they will wait about six weeks to see the impact of policy moves and remain data-dependent in their decisionmaking.

2. CPI INFLATION

• The Consumer Price Index CPI) rose just 0.1% month-over-month in May and climbed 4.0% over the previous 12 months, according to the latest release from the Bureau of Labor Statistics (BLS). May’s increase was the slowest annual increase in inflation since May 2021.
• Excluding food and energy, inflation was up 0.4% on the month and 5.3% year-over-year. Core and headline inflation numbers have steadily diverged, with core data remaining elevated. This is partially due to falling energy prices, which saw a 3.6% decline in May, causing headline CPI to fall faster than core. Shelter prices remained the largest contributor to price gains in May despite a gradual fall in home prices over the past several months.
• Real wages also improved for the average worker as hourly wages adjusted for inflation rose 0.2% on the month.

3. MAY JOBS REPORT

• The US added 339,000 new jobs in May while the unemployment rate rose by 0.3% percentage points to 3.7%, according to the Bureau of Labor Statistics.
• Job growth continues to hold firm despite fears about higher interest rates, slowing spending and investment, and recent layoffs in the tech industry. Professional and business services added more than 64,000 payrolls in May, while government employment increased by 56,000 jobs, followed by healthcare with a 52,000-job gain. Leisure and hospitality, construction, transportation, and warehouse also posted notable payroll growth during the month.
• However, recent waves of layoffs are reflected in the uptick in unemployment, which over the past several months has continued to hover above the 3.4% nadir that it hit in January 2023. The labor force participation rate remains little changed at 62.6%.

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• On-time rental payments in units operated by independent landlords dipped slightly in May, declining 108 basis points to 82.1%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics/RentRedi.
• Despite the decline, the on-time payment rate remains relatively robust and is up by 190 basis points compared to a year ago. However, at the same time, the on-time rate has now fallen by more than 100 bps in consecutive months— which could potentially lead to distress if the trend continues.
• As of May 15th, 1.2% of units had paid rent late, and 16.6% had yet to complete full payments. Chandan Economics projects that the late-payment rate for May will increase to 9.5% in the coming months, while the unpaid rate is expected to decline to 8.4%.
• Still, the forecast full-payment rate, which include received on-time and late payments plus anticipated late payments in upcoming months, is falling. The expected full-payment rate for May is just 91.6%— the lowest mark in eight months. These data indicate a potential worsening situation with late payments, suggesting a challenging outlook for rental affordability.

5. Q1 2023 SFR TRENDS

• SFR continues to perform well compared to other commercial property types despite challenges from rising interest rates and lower home prices, according to the findings from Arbor Realty Trust’s Q1 2023 Single Family Rental Investment Trends Report.
• The average SFR Occupancy rate was 94.4% in Q1 2023, with rent growth showing volatility but sustained gains in lease renewal rent growth. On-time rental payments in SFR properties remain healthy, while longterm fundamentals have maintained its favorable investment outlook.
• SFR cap rates increased during the quarter, rising to 5.9%, reflecting both a rise in the SFR risk premium d a stabilization in home prices.
• CMBS issuance did decline in the sector, reflecting a broader market decline, while debt yields rose, signaling caution from lenders in an uncertain housing market. Still, construction trends remain relatively robust in the sector. In the past year, SFR/Build-to-Rent accounted for a record high of 6.9% of new
  single-family construction.
• Southeastern Sun Belt states, in particular, show high demand for SFR properties, with lower average land prices contributing to their attractiveness.

6. TROUBLE BREWING IN CRE

• Warnings have been growing in volume about potential trouble brewing in CRE, much of which has focused on the estimated $270 billion in CRE loans coming due this year. Tightening lending conditions, increased funding costs, and compressed margins are creating a perfect storm for banks and increasing default risks for CRE loans.
• Office space faces challenges due to low occupancy rates resulting from the remote work boom, dampening rental growth. Office property valuations are under pressure from underperformance and interest rates reaching generational highs; refinancing those loans may prove difficult.
• Still, historically real estate has been seen as an effective hedge against inflation, and some investors are looking beyond the short-term volatility. Adaptive Reuse, which looks to convert older office buildings into multifamily units, has gained steam recently as a potential solution to office over-supply. Still, several challenges exist both from a financing and construction standpoint.
• Though banks nationwide are bracing for a potential CRE storm, some markets are more at risk than others. Markets with high pre-pandemic office supply, such as New York, San Francisco, and Chicago, are more exposed to the potential glut than other metros. Further, a recent wave of tech layoffs has made more tech-heavy cities more susceptible to slowing office demand. Local labor market trends will continue to be an essential barometer of the office market’s future in these metros.

7. A LONG VIEW OF THE OFFICE MARKET

• As concerns about the state of CRE grow, some investors are instead taking a long and nuanced view of the future of the office market.
• One key factor that will impact office valuations is property age. In addition to the location of an office property and the effect of local economic forces, how old an asset is will also significantly impact its value in the case of a bear market.
• Older properties will suffer more due to competition from higher-quality properties. Newer offices that cannot attract tenant demand are also better positioned for adaptive reuse projects, where conversions can be more cost-effective.
• There is also the expectation that some office activity will return two to four years from now. Business travel has started to recover from the depths of COVID, and remote work is creating a new quasi-tourist/ remote worker class in several highly amentized cities. While tenants in 2026 may be less interested in old-cubical-style designs left on the market, office properties that blend productivity and hospitality can capture new demand.

8. SELF-STORAGE: A CRE BRIGHT SPOT?

• With home prices and mortgage rates too high for many American families, the self-storage market has seen an uptick in space demand as several households downsize or look for space for new consumer items that their current residence can’t accommodate.
• Analyzing self-storage REIT performance, shares have averaged a return of 7.27% this year, outperforming the REIT average.
• According to data from Hoya Capital, while the sector has seen some softening from 2021 highs in occupancy and rents, they remain above pre-pandemic levels and are less exposed to potential overvalue issues than the broader CRE market.
• Funds from operation (FFO) for the Storage REIT sector is on pace for double-digit performance in 2023, following a 3.0% gain in Q1 2023.

9. DELOITTE’S Q2 2023 US ECONOMIC FORECAST

• In Deloitte’s latest US economy forecast, new projections arrive for the path of consumer spending, housing affordability, and business investment for the remainder of 2023.
• On consumer spending, forecasts zero in on the US savings rate. During the pandemic, many households saved significantly more than anticipated, but savings rates began to shrink as a post-pandemic activity wave met higher consumer prices.
• Deloitte projects two potential paths for consumer spending for the remainder of this year: cautious spending as consumers prioritize savings or a continued spending boom driven by summer travel and services.
• In housing, the forecast expects the decline in construction activity to continue in 2023, with a modest bounce back to begin 2024.
• Business investment is expected to become more selective. Investment in non-residential structures could slow. Investment in equipment and software has slowed from the pandemic-era boom. Still, it may continue to grow modestly as companies struggle with labor costs and competition and look for ways to
  become more capital efficient.

10. RETAIL SALES

• US retail sales unexpectedly rose in May, climbing 0.3% month-over-month following a 0.4% monthly increase in April. Economists had forecasted a 0.1% decline in May.
• Consumer spending appears to be resilient despite the pressure of higher prices and rising interest rates. The largest increases in sales were seen in building materials and gardening equipment (+2.2%), motor vehicles and parts (+1.4%), food services and drinking places (+0.4%), general merchandising stores (+0.4%) and furniture stores (+0.4%).
• Sales were flat at health, personal care, and clothing stores and fell 2.6% at gas stations.
• Core-retail sales, which exclude automobiles, gas stations, building materials, and food services, rose 0.2% month-over-month, following a 0.6% monthly gain in April.

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230614a.htm
• (2) https://www.federalreserve.gov/monetarypolicy/fomcminutes20230503.htm
• (3) https://www.bls.gov/news.release/empsit.nr0.htm
• (4) https://www.chandan.com/independent-landlord-rental-performance-report
• (5) https://arbor.com/research/single-family-rental-investment-trends-report-q1-2023/
• (6) https://www.thebanker.com/Markets/Capital-Mkts/Commercial-property-market-under-stress
• (7) https://www.forbes.com/sites/jamesnelson/2023/05/30/5-factors-to-consider-with-officeinvestments/?sh=2c1ff4b65f3d
• (8) https://seekingalpha.com/article/4610463-picking-winner-self-storage-reits
• (9) https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-outlookanalysis.html(10) https://www.census.gov/retail/marts/www/marts_current.pdf

NATIONAL OVERVIEW

Ask a real estate economist what the office sector will look like five years from now, and you might get a similar response as if you asked your hybrid coworker if they will be in the office next Tuesday: “Unsure. We’ll see.” When it comes to the office market, especially in central business districts, the sector has a full list of open questions to contend with.

The role of remote work looks like it will be a long-lasting legacy of the 2020 shutdown. While fully on-site remains the dominant model across all workers, for workers that can work from home (WFH), hybrid setups have emerged as the dominant model.

The office sector held the lowest investment and development prospects of any sector in the 2023 ULI/PwC Emerging Trends in Real Estate Survey — a sign that the sector’s functional uncertainties are impacting investment demand.

Of course, the sector’s hotspots of difficulty are generally in the dense central business districts of major cities — the kind of office markets that can have a workforce commuting an hour or more each way.

According to MSCI Real Capital Analytics, the price of CBD office space declined by 8.1% year-over-year in 2022. Meanwhile, suburban offices, which cater to a much more local workforce than their CBD alternatives, fared much better in 2022, with asset prices only dropping 3.6% from a year earlier. Moreover, suburban properties continue to make up a bigger slice of the office investment pie. In 2011, when CBD office assets were viewed as the safest of all CRE investments, suburban office assets accounted for just 48.0% of all US office transaction volume. Fast forward to 2022, this volume share has catapulted up to 72.2% — its highest annual share on record.

Financials

TRANSACTION VOLUME

According to MSCI Real Capital analytics, office transaction volume totaled $112.8 billion in 2022 — a 23.3% drop-off from the previous year. A pullback in transaction activity was not uncommon for most commercial property types in 2022, as 2021 saw record volumes due to pent-up demand and a sense of urgency to get deals done before interest rates would rise.

However, the office sector was unique in that its 2022 transaction volume total was low even compared to previous years other than just 2021. While 2022’s volume was 26.0% higher than 2020’s pandemic-depressed total, it is still the next smallest tally in recent memory. Compared to 2019’s pre-pandemic benchmark of $144.2 billion, last year’s total sank a discouraging 21.8% lower. Moreover, 2022 saw the least amount of property value trade hands since 2013 — a testament to the souring opinions surrounding large office buildings in gateway markets.

CAP RATES AND PRICES

Early on in 2022, cap rates in the office sector followed the declining trend that defined all commercial real estate property types. Even as open questions about the property type’s long-term functionality swirled, the anticipation of rising interest rates sent buyers scurrying to secure assets like a game of musical chairs where the record player just stopped.

However, by Q2, the market inflection was already underway. Cap rates ticked up marginally in Q2, followed by more substantial movements of 12 basis points in Q3 and Q4, respectively. The last time that office sector cap rates increased by 20 or more basis points in a six-month period was in 2009. By the end of 2022, office cap rates had jumped to 6.4%, reaching their highest levels since Q1 2021.

With office cap rates on the rise and new tenant demand remaining tepid, valuations took a hit in 2022. After reaching an all-time high of $268/sqft in Q1 2022, prices declined for the three remaining quarters of the year, falling to $255/sqft by Q4. Asset prices are down 4.1% year-over-year through Q4 2022. Moreover, compared to the record high set earlier in the year, Q4 prices were down by a slightly more substantial 4.7%.

Regional Performance

In developing the regional office rankings, the SVN Research Team utilized a scoring matrix. The matrix offers a comprehensive view of how regional markets are performing within the context of growth from a year earlier, as well as compared to before the pandemic. The eight following criteria were included in the matrix:

1. Transaction Volume: 1-Year % Change
2. Transaction Volume: % Change Over Pre-Pandemic (2019)
3. Share of US Transaction Activity: 1-Year Change
4. Share of US Transaction Activity: Change Since Pre-Pandemic
5. Cap Rates: 1-Year Change
6. Cap Rates: Change Since Pre-Pandemic
7. Pricing: 1-Year % Change
8. Pricing: % Change Over Pre-Pandemic

TOP PERFORMERS: MID-ATLANTIC

The Mid-Atlantic, which is anchored by the likes of Washington DC, Baltimore, Philadelphia, and Pittsburgh, came out as the top-ranking region for 2023, driven primarily by a recent burst of price growth. No region saw more office sector asset appreciation in 2022 than the Mid-Atlantic, where prices gained 13.4% last year.

Moreover, the Mid-Atlantic was the only region to see any price growth at all, as valuations sank year-over-year in all other parts of the country. Recent cap rate trends also have the Mid-Atlantic standing apart from the pack.

The Mid-Atlantic saw more cap rate compression than any other area in 2022 and was one of only two regions to see compressing average cap rates last year. Further, compared to three years ago, office cap rates in the Mid-Atlantic have come down by a national-best 80 basis points.

TOP PERFORMERS: SOUTHEAST

The Southeast pops up as a top-performing region again, which is hardly a surprise. The region continues to attract firms and workers that are ready to ditch costly office markets in favor of lower prices per square foot, lower tax bills, and an average temperature bump.

Over the past three years, no region has seen a bigger uptick in transaction activity market share. Between 2019 and 2022, the Southeast went from 12.7% of transaction activity by dollar volume to 17.2% — a 4.5 percentage point step-up.

Office prices are also up the most in the Southeast compared to any other region over the past three years. Compared to 2019, office valuations in the Southeast are up by 17.0% — narrowly beating the Mid-Atlantic and Southwest for the title.

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing on Buying or Leasing Office Space? Contact us.

1. CPI INFLATION

• US annual inflation continues to decelerate through April. As reported by the BLS, the Consumer Price Index grew 4.9% year-over-year as of the most recent reading. The current pace of growth indicates a slowdown compared to the 5% year-over-year growth witnessed in March, signaling a gradual easing of inflationary pressures.
• Despite overall signs of cooling inflation, shelter costs, up 8.1% year-over-year, remain a sore spot.
• Conversely, prices for airline fares, new cars, and communication declined throughout the month, providing some relief to consumers. Food prices have remained relatively stable, with grocery store prices generally decreasing while the cost of eating out has continued to rise.

2. RENTER VS. HOMEOWNER INFLATION

• Personal inflation rates can differ widely depending on whether someone rents or owns their home. According to Chandan Economics’ latest calculations, the adjusted CPI for renters was 4.9% year-over-year in April, its slowest annual pace since April 2021.
• Meanwhile, the adjusted CPI for homeowners held steady at 2.4% year-over-year in April, remaining virtually unchanged from March.
• Inflation rates are adjusted for each group, stripping rental costs for homeowners and homeownership costs for renters. Further, the calculation assumes that fixed-rate homeowners would not feel the impact of higher shelter costs, given that they have already locked in monthly housing expenses that do not change.
• The inflation spread between these two groups fell for the first time in nine months in April. However, the difference between renter and fixed-rate homeowner personal inflation rates remains near their all-time high, currently sitting at 2.6 percentage points.

3. FOMC INTEREST RATE DECISION

• On May 3rd, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 25 basis points to 5.00%-5.25%, electing to continue tightening the economy’s financial valves as it tries to bring inflation down.
• The FOMC’s policy decision arrives amid heightened concern and volatility in the banking sector, which saw three high-profile bank failures over the past six weeks. Despite the most recent collapse—that of First Republic Bank—occurring just 48 hours before the FOMC’s decision, the committee decided to proceed with a rate hike based on the belief that liquidity backstops continue to function for the banking sector despite the recent panic.
• In their accompanying meeting statement, the committee acknowledged that tightening credit conditions will likely weigh on households and businesses in the weeks and months ahead, placing downward pressure on hiring and inflation. Fed Chair Jerome Powell suggests that the committee will take a “data dependent” approach to their upcoming rate decisions, making May’s employment, inflation, and expectations data paramount to the future path of monetary policy.

4. SENIOR LOAN OFFICER OPINION SURVEY

• Results from the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey (SLOOS) released on May 8th indicate that lenders are increasingly worried about near-term financial conditions as recession fears rise amid banking sector distress.
• During Q1 2023, the percentage of lenders indicating tightening standards increased across several key loan types. A net 46.0% of large and medium banks and 46.7% of small banks signaled tighter standards for Commercial and Industrial loans in Q1 compared to Q4 2022, up slightly from 44.8% and 43.8%, respectively.
• The net percentage of lenders indicating tightening standards for Commercial Real Estate loans similarly increased across all sub-types. A net 73.8% of banks showed tighter lending standards for construction and land development loans in Q1 2023 compared to a net 69.2% in Q4 2022. 66.7% of banks indicated tighter standards for nonfarm residential loans compared to 57.6% in Q4 2022. Meanwhile, 64.5% of lenders indicated tighter standards for Multifamily loans in Q1 compared to 56.7% in Q4.
• According to the survey’s findings, the most frequently cited reasons for tightening standards were a deterioration in credit quality within their loan portfolios, reduced risk tolerance, and concerns about bank liquidity and deposit outflows.

5. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time payment rate in independently operated rental units declined by 98 bps between March and April, coming in at 83.6%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.
• Encouragingly, while the monthly on-time payment rate fell slightly, the forecast full-payment rate rose again in April to a new record high of 93.8% — improving 40 bps from March.
• The pressures of higher interest rates have led to higher cap rates and fewer transactions, while banking sector turmoil has caused lenders to tighten underwriting standards. Despite such supply-side distress, tenant resiliency has been strong, keeping the apartment market afloat.
• Of the states with at least 500 tracked units in the RentRedi-Chandan Economics sample, Washington holds the highest on-time payment rate of any state in the country, coming in at 92.8% in April. Massachusetts (92.0%) and Virginia (88.5) are close behind. All three top performers are coastal, high incomes states.
• On-time payment rates dropped across all price points in April, with low-priced rentals seeing the largest month-over-month declines. By property type, 2–4-unit rental properties continue to see the highest on-time payment rates of all sub-property types as they have throughout the life of Chandan Economics’ tracking, coming in at 84.7% in April.

6. APRIL JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 253,000 jobs in April while the unemployment rate dropped slightly to 3.4%.
• Job growth exceeded most market expectations in April, remaining robust despite rising concerns about banking sector distress and rising recession risks. Meanwhile, average hourly wages rose by 4.4% year-over-year.
• The most significant job gains by industry occurred in professional and business services (+43,000), health care (+40,000), and leisure and hospitality (+31,000). Sectors that saw little change in payroll totals include construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, and other services.
• The strength of both job and wage growth should calm some short-term recession fears but also risks further complicating the Federal Reserve’s policy goals. On May 3rd, the FOMC raised their target fed funds rate by 25 basis points, signaling that inflation remains a broader risk despite recent bank failures and, therefore, is a higher priority.

7. NFIB SMALL BUSINESS OPTIMISM

• The NFIB Small Business Optimism Index, which indicates the strength of small businesses in the US, experienced a decline of 1.1 points in April. According to the survey, the two most significant challenges small businesses face are labor quality and inflation.
• Many owners have found themselves with excessive inventory due to overestimating demand. Owners are adjusting accordingly and beginning to decrease prices by an average of four points. Overall, there is an increased pessimism, with many owners expecting lower sales figures compared to March.
• Regarding employment, 17% of owners anticipate creating new jobs in the next three months, while 40% expect to be raising compensation for employees. Half of those planning to raise wages intend to do so within the next three months. However, it is worth noting that 33% of owners consider labor costs or labor quality to be their primary business challenge.

8. MORTGAGE APPLICATIONS

• Mortgage applications climbed by 6.3% during the week ending on May 5th, 2023, its most significant increase in close to two months, according to the Mortgage Bankers Association. During the last week of April, applications contracted by 1.2%.
• Refinance applications surged by 10.0% during the first week of May, while purchase applications rose 4.8%.
• The average rate on a 30-year fixed-rate mortgage dropped two basis points to 6.48% during the week — its lowest in three weeks.
• Application demand fell significantly during the second half of 2022 as mortgage rates rose steeply. After falling for much of December, mortgage applications increased to begin 2023 as market rates began to fall from their peak. Recent signals by the Fed suggesting a potential pause in interest rate hikes in the near future also appear to be contributing to a rise in demand.

9. ISM PURCHASING MANAGERS INDEX

• The Manufacturing PMI, a composite index where a reading above 50 generally indicates expansion in the sector while a reading below 50 indicates a contraction, measured at 46.3% in March, 1.4 percentage points below the February total.
• March represents the fourth consecutive month of contraction following 30 months of consecutive expansion, with the PMI reaching its lowest level since May 2020, when it fell to 43.5%.
• A sub-index measuring new orders fell to 44.3% — 2.7 percentage points below its February figure. The production sub-index rose slightly to 47.8%, half of a percentage point above February’s total but still in contraction.
• The prices sub-index fell 2.1 percentage points to 49.2% in March. The backlog of orders sub-index fell 1.2 percentage points to 43.9%.
• All remaining sub-indices, including the employment index, the supplier deliveries index, the inventory index, and the export and import indices, all moved lower in March compared to the month before and remain in contraction.

10. INFLATION AND INTEREST RATE EXPECTATIONS

• Inflation expectations for the year ahead dropped to 4.4% in April. Still, they increased at the three- and five-year forecasts, registering at 2.9% and 2.6%, respectively, according to the New York Fed’s Survey of Consumer Expectations. The median one-year ahead expected inflation rate peaked in June 2022 and has been receding ever since.
• Sentiment regarding current credit access and expectations of future credit access were mostly unchanged during the month. Credit sentiment began to shift in late 2021/early 2022 and has remained relatively stable since.
• As inferred by the Chicago Mercantile Exchange’s Fed Watch Tool, market forecasts firmly expect no interest rate hike by the Fed at its June 2023 meeting, anchored by falling inflation data and recent liquidity issues in the banking sector.
• Additionally, futures markets predict at least three rate cuts by the Fed by year’s end based on the prediction that policymakers will be forced to pivot if economic growth slows and unemployment rises due to tighter financial conditions.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (3) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm
• (4) https://www.federalreserve.gov/data/sloos/sloos-202304-chart-data.htm
• (5) https://www.chandan.com/independent-landlord-rental-performance-report
• (6) https://www.bls.gov/news.release/empsit.nr0.htm
• (8) https://www.mba.org/news-and-research/newsroom/news/2023/05/10/mortgage-applicationsincrease-in-latest-mba-weekly-survey
• (9) https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-onbusiness/pmi/march/

Rent cap and eviction protection are extended despite a tie vote by the supervisors.

The Los Angeles County Board of Supervisors opposed extending rent safeguards for another year and extending the provisions to unincorporated regions of the 4,083-square-mile county, an area larger than Rhode Island. The vote was tied at 2-2 with one abstention.

Resolutions to limit rent increases to 3% or the change in the Consumer Price Index over the previous year, whichever is less, were among several that fell short of a majority. According to a story in the Los Angeles Daily News, the measures would have also prolonged residential renter rights for one year throughout the county and its 88 communities.

Protecting tenants from eviction who have taken in extra occupants—including pets—during the pandemic and prohibiting landlords from evicting tenants without a reason were among the rights that were not extended.

The Board of Supervisors was encouraged by tenant and renters’ rights organizations to extend the pandemic-era rent safeguards because they think a wave of evictions is on the way that will peak when the county formally ends the COVID-19 emergency on March 31.

The tenant safeguards would have added further difficulties to landlords who are already dealing with growing prices, according to a group of roughly 20 self-described mom-and-pop landlords and numerous trade organizations that represent apartment owners.

According to the newspaper report, Fred Sutton, vice president of public affairs for the California Apartment Association, told the board that “cities can make these decisions on their own.”

Supervisor Janice Hahn, who voted against the rent protection extensions, claimed that she would have voted in favor of them a year ago, but that now that the pandemic is over and unemployment is low, Los Angeles County no longer needs “emergency regulations” and “restrictions” shouldn’t be placed on landlords in unincorporated areas.

According to Hahn, the county would provide assistance to unincorporated cities in developing their own local rent rules. The board adopted a resolution ordering the county director of consumer affairs to be available to assist localities in developing rent regulations after rejecting the renter protection extensions.

Co-author of the resolution extending renter rights, Supervisor Lindsey Horvath, made the case that the protections are crucial for reducing homelessness.

According to the newspaper story, Horvath said that a state of emergency had been established regarding homelessness. Helping those folks afford the homes they are in is the most crucial thing we can do to stop the flood of homelessness.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.

Voters were promised a housing fund of $900 million; the city now expects about $672 million.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale/lease.

1. INFLATION

• The Consumer Price Index (CPI) rose 0.4% month-over-month and 6.0% year-over-year on a seasonally adjusted basis through February, according to the Bureau of Labor Statistics’ March 14th release. Both the monthly and annual measures decelerated from January.
• Last month’s annual inflation rate was the lowest since September 2021, while the previous two months have seen a rise in monthly inflation after slowing to 0.1% and 0.2% in the final months of 2022. Core prices have risen by 5.5% over the past 12 months, the lowest annual climb since 2021, but registered their highest monthly increase since September.
• Shelter accounted for roughly 70% of monthly price increases, rising 0.8%. Food prices rose 0.4%, while energy prices fell by 0.6% month-over-month.
• Eyes now turn to the Fed — with their March policy meeting on the horizon, markets have tried to telegraph their upcoming policy decision in the face of tight labor markets, recent US bank collapses, and mixed inflation data. Following Tuesday’s CPI release, futures markets coalesced around a 25 basis point forecast for next week’s policy decision.

2. SILICON VALLEY BANK CRISIS

• The March 10th collapse of Silicon Valley Bank — and Signature Bank a few days later — became the largest US bank failures since the 2008 financial crisis. For the former, a requested capital raise triggered a crisis in confidence among depositors who feared a deterioration in bank liquidity, triggering a run on the bank and, eventually, government intervention.
• The collapse highlights the risk posed by a rising interest rate environment on the financial system, resurfaces questions about moral hazard in banking, and complicates the Federal Reserve’s hawkish stance as it prioritizes price stability amid high inflation.
• Markets initially fell in the wake of the bank failures but have rallied in the days since as federal intervention and reduced fears around contagion restore confidence in the financial system.
• While regulators stepped in with depositor guarantees and public assurances to help affirm faith in the financial system, futures markets have adjusted their forecast for the upcoming FOMC rate-hike decision to reflect an expected 25 basis point hike, down from a projected 50 basis point hike that markets predicted just a few weeks ago.

3. CRE EXPOSURE TO RECENT BANK COLLAPSES

• The recent closures of California’s Silicon Valley Bank (SVB) and New York’s Signature Bank could have implications for commercial real estate lending. While much of SVB’s business was concentrated in the tech sector, the bank’s 2022 financials showed that 15% of its loans were attached to residential mortgages
  or commercial real estate projects.
• Moreover, Signature Bank’s business focused on CRE lending. The bank’s balance sheet shows that it held $110.36 billion in assets and $88.59 billion in deposits at the close of 2022. $35.7 billion of Signature’s portfolio included loans for multifamily, commercial property, acquisition, development, construction, and home equity lines of credit.
• The tech sector’s exposure to SVB could also have implications for prop-tech firms, not only due to direct exposure but due to the common thread of venture capital firms whose portfolio consisted of several businesses that lacked diversified banking relationships. Banks often typically require single-banking relationships from lending agreements with large depositors — a standard that will likely come under increased pushback in the future.
• On the other hand, many analysts believe that The Federal Reserve’s backstopping of affected banks last weekend helped restore confidence among depositors at tech-focused banks. Some VC groups focused on prop-tech have stated that recent distress will not significantly impact their activity in the sector.

4. MORTGAGE RATES FALL

• Mortgage rates fell to begin the week, with the 30-year fixed mortgage dipping to 6.57% on Monday, March 13th, from a recent high of 7.05% registered last Wednesday.
• Movements in mortgage rates are generally concurrent with movements in US Treasuries, which saw yields fall sharply in the wake of last week’s bank collapses.
• After reaching a high of 7% last September, mortgage rates declined to close 2022 and fell as low as 6% in January, prompting an 8% jump in pending home sales that month. Recent rate reduction could generate a similar jump in homebuying activity in March.
• Since mortgage rates are indirectly influenced by movements in the Federal Funds rate, recent volatility around March rate hike projections is likely also contributing to the recent fall in rates.

5. MARCH RATE-HIKE PROBABILITIES

• Forecasts for this month’s interest rate decision by the FOMC are somewhat split as of March 15th, 2023. According to the Chicago Mercantile Exchange’s Fed Watch Tool, markets are pricing in a 55.4% probability of a 25-basis point hike at the Fed’s March policy meeting, while 44.6% see the committee
  holding rates at the current range of 450-475.
• Recent US bank failures catalyzed the current split consensus and increased the likelihood of a rate-hike pause. Some investors are betting that the financial market distress will encourage the Fed to pause rate increases to provide liquidity to the market.
• However, financial markets have normalized in recent days. While concerns about the banking system remain front of mind, recently released inflation numbers showed only a marginal month-over-month deceleration in price pressures. With inflation still the primary focus of ongoing Fed policy, they are likely to move forward with a 25-basis point hike.
• Futures markets now anticipate a slower pace of Fed rate increases moving forward and forecasts that the committee will terminate rate hikes after the May meeting.

6. NAIOP INDUSTRIAL SPACE DEMAND

• NAIOP, a commercial real estate development trade association, raised its projection for Industrial net absorption in 2023 in the latest Industrial Space Demand Forecast.
• The Q1 report, released earlier this month, revised its estimate for net absorption in 2023 up to 310 million square feet, which reflects a more resilient economic start to the year than previous estimates anticipated and upwardly revised net absorption totals from 2022. NAIOP forecasts 323 square feet of Industrial net absorption in 2024.
• During the final two quarters of 2022, Industrial net absorption averaged 176 million square feet, a significant drop from the 236 million square feet absorbed during the first two quarters of last year. Overall, the sector finished 2022 with a net absorption of 413 million square feet.
• Despite rising interest rates and new supply coming online, the Industrial market remains a standout in CRE performance, with low vacancy rates and industry-leading transactions and price growth.

7. FEBRUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 311,000 jobs in February while the unemployment rate ticked up ten basis points to 3.6%.
• While US job growth declined from a 6-month high of 517,000 in January, February’s growth was still robust in a historical context, remaining well above the average job-add levels seen during the post-GFC jobs cycle.
• Despite the uptick in unemployment and a recent rise in jobless claims, last month’s jobs numbers combined with February’s inflation rate of 6.0% are likely to reinforce policymakers’ conclusion that the labor market is too tight relative to price stability, prompting them to push forward with a March rate hike.
• The leisure and hospitality, retail trade, government, and healthcare sectors saw the most significant employment growth. Employment declined in Information occupations, including tech, and transportation.

8. JOB OPENINGS AND UNEMPLOYMENT

• Total US job openings declined in January, falling from 11.2 million in December to 10.8 million in the first month of 2023.
• Total hires and separations were little changed during the month, registering 6.4 million and 5.9 million, respectively. However, breaking down the separations data, a decline in quits was offset by a rise in layoffs, a potential signal that the labor market is beginning to loosen.
• Job openings per unemployed person continue to sit near record highs, holding at 1.9 available jobs per unemployed worker, unchanged from the previous month. The ratio has been persistently high since mid-2022. In January 2020, shortly before the pandemic began, the ratio stood at 1.2, which had been a post-GFC peak.
• While record job openings continue to elevate the ratio, continued increases in joblessness may begin to place downward pressure on it. During the week ending on Saturday, March 4th, 211,000 people filed initial jobless claims, up from 190,000 the week before.

9. APARTMENT MARKET INVESTMENT INDEX

• The Freddie Mac Multifamily Apartment Investment Market Index (AIMI), a measure of overall multifamily sector investment health that tracks asset prices, property-level incomes, and mortgage rates, fell by 7.6% during Q4 2022 and 25.8% year-over-year.
• The AIMI declined in all the 25 major market tracked by Freddie Mac, and corresponds with rising mortgage rates that dampened investment demand, resulting in the index’s sharpest annual drop in its history.
• Analysts generally agree that the Multifamily sector fundamentals have not, nor are they expected to, weaken significantly, but falling net operating income and property price are indicative of broader monetary constraints as borrowing costs climb and investors become more selective.

10. CONSTRUCTION COSTS

• According to the latest Cost of Construction Survey by the National Association of Home Builders (NAHB), roughly 60% of sale value consisted of construction costs in 2023, based on average home sales prices.
• Since NAHB began tracking construction cost-to-value ratios in 1998, the metric has only risen above 60% on three other occasions. However, the recent uptick is not a significant deviation from historical patterns. Construction costs last crossed the 60% threshold in 2019, when they contributed towards 61.1% of home values, with the other two instances in 2013 and 2015, which saw ratios of 61.7% and 61.8%, respectively.
• Breaking construction costs down further, interior finishes accounted for the largest sub-share (24.0%), followed by framing (20.5%), major system rough-ins (17.9%), exterior finishes (11.8%), foundations (11.0%), site work (7.4%), final steps (5.9%), and other costs (1.5%).
• Finished lot costs contributed the second highest cost at 17.8%, a decline from 2019’s 18.5%. Overhead and general expenses averaged 4.9%, unchanged from 2019, and were followed by sales commission (3.6%), financing costs (1.9%), and marketing costs (0.7%) — all of which have fallen from 2019 contribution levels.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (2) https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank
• (3) https://www.globest.com/2023/03/14/%E2%80%8Bbanks-collapse-affecting-mortgage-rates-vcproptech/
• (6) https://www.naiop.org/research-and-publications/research-reports/reports/industrial-spacedemand-forecast-1q23/
• (7) https://www.bls.gov/news.release/empsit.nr0.htm
• (8) https://www.bls.gov/news.release/jolts.nr0.htm
• (9) https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-macmultifamily-apartment-investment-market-index-0?_ga=2.226689373.1581823799.1678995759-1965643130.1605283640
• (10) https://www.nahb.org/blog/2023/03/60-percent-of-home-sales-price-goes-to-construction-costs

In response to the recent approval of a set of eviction and rent safeguards for renters around the city, multifamily landlords in Los Angeles are taking legal action.

The Greater Los Angeles Apartment Association (AAGLA) filed a lawsuit against the city to overturn and prohibit the execution of the new ordinances that make it more difficult to remove tenants as well as penalize landlords for raising rent.

One of the ordinances in dispute demands that at least one month’s worth of rent be unpaid before starting the eviction process. The other requires landlords to cover relocation costs if a tenant is displaced as a result of a rent increase of at least 10% or by 5% above the rate of inflation, whichever is lower. That entails paying $1,411 in moving expenses in addition to three times the unit’s fair market rent.

The office of City Attorney Hydee Feldstein Soto stated that it is reviewing the case but would not provide any further information.

Cheryl Turner, head of the AAGLA board of directors, declared that the new ordinances are “clearly illegal” under the state’s Costa-Hawkins Rental Housing Act, a 28-year-old statute that exempts some properties from rent-control regulations.

Rental units like newer construction, single-family homes, and condominiums are exempt from price controls like rent stabilization ordinances, but [the city’s new ordinance] potentially imposes severe financial penalties on any owner that increases rent above specified limits on a rental unit that is exempt from rent control, should the renter then decide to move, Turner said in a statement.

The policy, according to Turner, flies in the face of state law, which enables owners to issue three-day notices and commence legal processes, as it needs a minimum amount of past-due rent to trigger evictions.

Renters may now continue to live in their homes in violation of their lease agreements without facing consequences because owners may now have to wait months or even years to collect past-due rent, according to Turner. According to the city’s ordinance, renters, not property owners, can now effectively determine the amount of rent they desire to pay.

Unscrupulous tenants can simply stretch out legally owed rent payments for months or even years by “short-paying” rent in increments of $50, $100, or more per month, according to Daniel Yukelson, executive director of AAGLA, and rental property owners will be left with little to no remedy.

To make matters worse, there are very few remedies under state law to collect the aged, compounded rental obligation after any amount of delinquent rent is past due for more than 12 months, Yukelson added.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale/lease.