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.

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

1. JANUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 517,000 jobs in January while the unemployment rate was little changed at 3.4%. The number of unemployed persons was also little changed at 5.7 million.
• On the surface, the January report registered way above most industry expectations, with some observers concerned that the Federal Reserve may need to continue rate increases for longer than markets are anticipating. However, January’s total is likely to be significantly revised downward following adjustments, as is historically common during January.
• Notably, January’s significant payroll increase followed the announcement of massive layoffs by several tech giants, including Google and Microsoft — while corporate America also frets about the risk of a looming US debt ceiling limit.

2. FOMC INTEREST RATE DECISION

• On February 1st, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 25 basis points to 4.50%-4.75%, slowing their speed of rate increases after four consecutive 75 basis point hikes and one 50 basis point hike in December.
• The FOMC’s policy decision arrives after weeks of falling leading inflation indicators. However, several macroeconomic indicators remain far from recession territory, convincing many officials to stay committed to additional increases and holding rates higher for longer if needed.
• Based on data from the Chicago Mercantile Exchange’s Fed Watch tool, most market watchers anticipate another 25 basis point hike at the FOMC’s next meeting in March.

3. JEROME POWELL STATEMENTS

• In his first public press conference since January’s 25 basis-point hike, Federal Reserve Chair Jerome Powell claimed that the Fed still has a “significant road ahead” to bring down inflation, despite the FOMC recently slowing their pace of rate hikes.
• Powell’s comments came just a few days after the release of the January jobs report, which showed higher-than-expected payroll growth and an unemployment rate pushed to its lowest level since 1969.
• Powell suggested that several more rate increases are likely on the horizon, though he did not indicate what the pace of the increases may be. He also states that the longer-run Fed Funds rate will likely end up higher than where markets are currently pricing.

4. HOUSING AFFORDABILITY INDEX

• According to the latest Housing Affordability Index by the National Association of Realtors, housing affordability rose in December for the second consecutive month, following consecutive declines in September and October.
• The index reflects how much a “typical” family can afford a “typical” home, defined as a family earning the median family income and an existing single-family home at the national median price, respectively. The median-priced existing single-family home has declined for seven consecutive months, while the median family income has risen for 12 straight months.
• Regionally, housing affordability is highest in the Midwest, followed by the Northeast, while the South and West were less affordable. All regions have seen affordability rates fall precipitously over the last year.

5. FREDDIE MAC MORTGAGE MARKET INDEX

• According to Freddie Mac, mortgage rates rose slightly during the week ending on February 9th.
• The 30-year fixed-rate mortgage ticked up to an average of 6.12% as of February 9th, up three basis points from last week. The 15-year fixed rate mortgage averaged 5.25%, up from 5.14% the week before.
• Mortgage rates remain well above their levels from a year ago as the Federal Reserve continues its monetary tightening actions in an effort to calm US inflation. In recent weeks, mortgage applications have risen significantly as rates began to dampen slightly in January. The recent uptick may be a boon to homebuying markets as consumer interest grows right in time for the busy spring season.

6. 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, increased to 57.6 in January, up from 54.6 the month before and is the index’s second consecutive monthly increase.
• The consecutive increases follow seven declines in the LMI over the past eight months. According to the report, the uptick was primarily driven by the transfer of overstocked inventories away from upstream wholesalers toward downstream retailers.
• Notably, a temporary increase in the LMI in September 2022 came amid supply chains that were newly flushed with high inventory. Such fundamentals at the time signaled that goods were merely moving from place to place, and during the previous two LMI increases, inventories were much lower. The consistency may be showing the beginning of a trend toward sector growth.
• According to the report, another critical development for global warehousing and transporting activity is the reopening of China’s economy. Over the past several years, supply chains had to account for the “start-stop” nature of Chinese manufacturers. However, an economic surge in January after an end to the nation’s “zero-COVID” policies is sparking new life and certainty in logistics markets.

7. CMBS DELINQUENCIES FALL IN JANUARY

• According to data from Trepp, the CMBS delinquency rate declined in January 2023, following several months of only tepid increases despite anticipated trouble arising from rapidly rising interest rates.
• The Trepp CMBS delinquency rate fell ten basis points in January to 2.94, the second-lowest reading since the pandemic began. Annually, delinquencies are down by 124 basis points.
• Tracking delinquencies by sector, Industrial maintains the lowest rate of 0.40%, falling slightly monthover- month. Multifamily follows with a delinquency rate of 1.56% in January, down from 2.17% in December. Office registered a 1.83% delinquency rate in January, a 30 basis points increase and the only sector outside of lodging that saw a month-over-month increase. Lodging delinquencies stand at 4.44%, up from 4.40% in December. Meanwhile, Retail maintains the highest delinquency rate by sector at 6.58% but is down nearly 40 basis points from the month before.

8. VTS OFFICE DEMAND INDEX

• Office demand finished 2022 down 20.7% year-over-year, according to the latest Office Demand Index by VTS (VODI).
• Notable upticks in office demand occurred during the Spring and Fall of 2022; however, it was not enough to offset other seasonal declines.
• According to VTS, office demand has strongly correlated with average job postings over the past year. Washington DC exemplified this, with the local VODI increasing 21.4% year-over-year through December 2022 as the metro’s concentration of government, nonprofit, and professional services employment helped keep demand high.
• Remote work remains the most significant challenge to office sector growth, though its prevalence has declined. Work-from-home prevalence has reduced from roughly 5% to 30% during the early days of the pandemic to a current range of 40 to 60%. The variation in the frequency of occupations using remote work has narrowed while remote work rates have stabilized at current levels.

9. MSCI 2023 TRENDS TO WATCH

• A new report by MSCI summarizes several key trends in Real Estate that the authors believe will be pertinent in 2023, including the importance of price expectations for market liquidity and a more critical role for market fundamentals.
• Higher interest rates are creating repricing opportunities for many commercial real estate assets sold during the previous decade’s low-yield environment. As a result, there is a growing gap in price expectations between buyers and sellers, accelerating the slowdown in transaction volume. How this gap shifts will be vital in evaluating likely 2023 outcomes.
• Similarly, as the Fed tightens interest rates, yield performance is no longer accelerating market returns, forcing managers to focus on retaining tenants and operating efficiently.

10. ECONOMIC OPTIMISM

• Economic optimism in the US increased to a ten-month high in February, according to an Index developed by Investor’s Business Daily and Technometrica Market Intelligence.
• The index is based on a nationwide survey of 900 adults and measures the six-month forward-looking economic outlook, where a reading above 50 indicated optimism and one below 50 indicated pessimism.
• February’s Economic Optimism Index ticked up to 45.1 from 42.3 in January. Though the index remains in “pessimistic” territory, the percentage of consumers who believe that the US is currently in recession or that their personal finances are at risk saw month-over-month declines.
• Other key items included climate risk, which has proven difficult for investors to price, but rising evidence shows that buildings that meet specific sustainability standards sell at high premiums. Down-market resilience and due diligence in using data were also important developments to keep an eye on.

SUMMARY OF SOURCES

•  (1) https://www.bls.gov/news.release/empsit.nr0.htm
• (2) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230201a.htm
• (3) https://thehill.com/finance/3847680-heres-why-the-strong-january-jobs-report-will-push-interestrates-higher/
• (4) https://www.nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index/methodology
• (5) https://freddiemac.gcs-web.com/news-releases/news-release-details/mortgage-rates-increaseslightly-1
• (6) https://www.the-lmi.com/
• (7) https://www.trepp.com/instantly-access-delinquency-report-january-2023?utm_
  campaign=Delinquency%20Report&utm_medium=email&_hsenc=p2ANqtz-8Z7gFrQUDi9GPmrvVWBjUKEiUBV0HOrlsUTxQu-
  aXkawu8O8iVUn0ETjXmHKmL8HlHbVaC1-_sDt9Cf0ve3_W_wiE2Q&_
  hsmi=244332373&utm_content=244332373&utm_source=hs_email&hsCtaTracking=633d8656-b8ab-
  4cee-aa48-48c94fb2d86d%7C3d1edecf-80f8-4c7a-83e6-cf60e3259855
• (8) https://www.vts.com/
• (9) https://www.msci.com/research-and-insights/2023-trends-to-watch-in-real-assets?utm_source=onemsci&utm_medium=email&utm_campaign=msci-weekly-2023-2-9
• (10) https://www.bloomberg.com/press-releases/2023-02-07/february-s-ibd-tipp-poll-showseconomic-optimism-on-the-rise

Research demonstrates that eviction safeguards helped keep people housed throughout the crucial period of the pandemic, according to tenant advocates and renters. These supporters contend that maintaining renters in their housing shouldn’t end with the pandemic’s emergency phase in a city where a sizable portion of the population is homeless.

Nithya Raman, a council member whose district includes Encino, Silverlake, and Los Feliz, described the additional safeguards as the most significant since the establishment of the Rent Stabilization Ordinance in a tweet on Friday.

Before the end of this week, the council is expected to hear from the two last components of the renter safety net. The other would establish a minimum amount of time that would need to pass before tenants could be removed for nonpayment. The first would mandate that landlords provide basic relocation assistance for tenants who move out because they have experienced a rent rise of 10% or more.

Sasha Harnden, the public policy advocate with the Inner City Law Center, said, “We must put the two remaining permanent protections in place so that we can have a really full safety net of protections and make sure that we do not see a rise in evictions and homelessness.”

According to Harnden, only those two safety net components can effectively address rent and renters in the future. In the event that they are put into effect,   “we will have the strongest protections for non-payment evictions in the county of Los Angeles,  maybe in the entire nation,” he claimed.

In a way that we haven’t seen in a while, according to Harden, the council’s five new members have demonstrated genuine leadership and real engagement with these issues.

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

Given the ongoing uncertainty, the sentiment gauge is still in the negative zone.

You need to know where to duck and move when situations change, possibly quickly.

Expect a difficult interest rate environment for several more months.

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

1. CPI INFLATION

• The Consumer Price Index (CPI) rose 6.5% year-over-year and just 0.1% month-over-month, according to the latest numbers from the Bureau of Labor Statistics — relatively in line with most industry estimates. The annual inflation rate has now fallen for six consecutive months.
• Core CPI, which removes food and energy prices from the calculation and is more closely tied to monetary policy decisions, rose 5.7% over the past 12 months and 0.3% between November and December.
• Gasoline led all price declines, dropping -9.4% month-over-month and -1.5% year-over-year. Used cars and trucks also saw significant cooling, falling -2.5% month-over-month and -8.8% year-over-year.
• Food and shelter costs continue to rise, with the former appearing to decelerate from 2022 price pressures. The food index has risen 10.4% year-over-year, but after reaching a 1.1% monthly increase in July 2022, food costs inflation has steadily slowed, registering a 0.3% increase in December.
• Stocks rose following the news, as markets hope these data signal a peaking of US inflation and a potential upcoming slowdown in the Fed’s interest rate hikes.

2. INFLATION EXPECTATIONS

• Results from the New York Fed’s latest Survey of Consumer Expectations, taken in December, show consumers are growing more optimistic about the inflation outlook. Respondents expect one-year inflation to grow at 5.0% in the 12 months ahead, down 0.2% from the November survey and the lowest survey result since July 2021.
• Economists view consumer expectations as essential in actual inflation’s outcome, as they influence consumer behavior that may self-fulfill the economic effect they predict. The New York Fed’s meter reached a record high of 6.8% in June 2022 amid a 40-year high in inflation.
• Consumers expect gas prices to rise 4.1% over the next 12 months while projecting food prices will grow 7.6% over the same period. Projections for both figures declined month-over-month.
• Longer-term inflation expectations were little changed.

3. U-HAUL MOVING DATA

• End-of-year transaction data from U-Haul showed a continuation of migration towards the southeast and southwest United States in 2022 — a continuation of trends that were present before but accelerated during the pandemic.
• U-Haul’s index calculates its rankings based on a net gain of one-way truck arrivals in each state or city. Texas ranked #1 for the second year in a row and the fifth time since 2016. Florida ranked second — its seventh consecutive year in the top 3. South Carolina was ranked 3rd.
• California and Illinois ranked the lowest on the index for the third consecutive year. In addition to New York, California and Illinois ranked the highest in truck demand, as more people leave areas on the west coast, midwest, and northeast.

4. ATTOM 2023 STATE OF REAL ESTATE INVESTING

• In their look-ahead report for 2023, ATTOM signals caution in specific sectors while taking note of the shifting strategies taking place among investors that are leading to new opportunities.
• Focusing on “fix-and-flip” investors, the report notes that as higher financing, labor, and material costs cause these investors’ profit margins to compress, some are shifting to wholesales of properties to rental property buyers or a shift to “fix-and-hold” until market conditions improve.
• The report notes that as consumers enter their own holding pattern, opting to rent instead of buy as home prices and mortgage rates strain affordability, shifting to “fix-and-hold” strategies is likely a sensible approach.
• ATTOM also projects foreclosures to remain below pre-pandemic levels throughout most of 2023, preventing an influx of distressed properties from hitting the market and pushing downward on prices.

5. NEW TRENDS IN INDUSTRIAL REAL ESTATE

• Breaking down Industrial’s newest trends, Moody’s recently analyzed data showing a shift from location-centric to labor-centric capital spending.
• The analysis notes that as labor market tightness and inflationary pressures hold, it is becoming increasingly crucial for warehouse and distribution properties to be near qualified labor.
• Furthermore, prospective tenants of Industrial properties are also becoming more concerned about the physical makeup of the property, reflecting the higher-implied cost of employee retention. Moody’s suggests that at current wage rates for warehouse and distribution jobs, employees generally tolerate a 20-minute commute time before there is a greater demand for pay and benefits. To balance this trade-off, firms seek spaces large enough to accommodate added amenities for workers, including outdoor spaces for breaks.
• Of course, location still matters outside of the context of labor. Proximity to population centers remains among firms’ most critical factors when seeking new space. Other key factors include ceiling height, power supply, and buildings that account for ESG concerns.

6. NFIB SMALL BUSINESS SURVEY

• The National Federation of Independent Businesses Small Business Optimism Index declined 2.1 points in December to 89.8. its twelfth consecutive month below the index’s 49-year average (88).
• A net negative 51% of owners expect business conditions to improve over the next six months. Future expectations have now fallen consecutively since January.
• 32% of respondents report inflation as their more pressing issue for operating their businesses, with a 68% share of that group reporting input costs as the main culprit compared to the 34% who say labor costs as more pressing. Still, the net percent of owners who raised average product prices fell by 8 points in December to a net 43% (seasonally adjusted), the lowest since May 2021.
• 55% of small firms reported capital outlays in the previous six months, unchanged from the previous one. Within those who’ve spent capital in the past six months, just 11% improved or expanded facilities, down 1 point from November, while just 4% acquired new buildings or land for expansion, also down 1 point from November.

7. LOGISTICS MANAGERS INDEX

• The Logistics Managers’ Index (LMI), a diffusion index where above 50 signals expansion and below is contraction, increased to 54.6 in December, up from 53.6 the month before, which had been the second-lowest reading on record. The uptick was in-line with the typical holiday season that necessitates expansion in the space by many retailers.
• Inventory levels are increasing (57.3), but at a slower rate than much of 2022. Inventory was higher for downstream firms (62.8) than upstream firms (53.3) in December, with the former holding more stock in warehousing in preparation for the holiday season.
• Transportation capacity fell in December to an index reading of 48.1, its first contraction since April 2020. Meanwhile, transportation prices fell to a reading of 36.9, representing the sharpest rate of contraction on record.

8. FY 2023 APPROPRIATIONS BILL

• At the end of 2022, Congress successfully passed its fiscal year 2023 spending bill, which included, among others, several provisions that may impact commercial real estate development.
• While absent of significant tax implications, the bill includes a 10.6% increase in funding for the Department of Housing and Urban Development, with much of the increase funding additional tenant-based rental assistance in the form of housing assistance and housing choice vouchers.
• The bill also provides funding to cover the renewal of all existing contracts utilizing its Project-Based Rental Assistance program and a massive 24.2% increase in the Community Development Fund (CDF).
• Within CDF funding includes $85 million for a new program, “Yes In My Back Yard,” which incentivizes housing development by reducing exclusionary policies, including zoning and density restrictions.

9. WORLD BANK 2023 GLOBAL GROWTH FORECAST

• Global growth is expected to fall to its third-weakest pace in nearly three decades, dwarfed only by the 2009 (Great Financial Crisis) and 2020 (Covid-19 Pandemic) global recessions, according to the World Bank.
• Weakness within the three major centers of global growth — The US, the Euro area, and China — is expected to spread into major economies as foreign investment and import growth from those nations stall.
• Moreover, monetary policy tightening in advanced economies alongside a strong US dollar has led to large capital outflows from developing nations. The World Bank expects the US Federal Reserve’s aggressive tightening to sharply slow domestic growth.
• According to the report, US consumers have enjoyed a 5% decline in brent crude oil prices between February and November 2022; however, due to the continued weakening of foreign currencies relative to the US dollar, brent crude has risen 7% in domestic currency terms, on average, in all other advanced economies.
• Global energy prices are expected to ease in 2023, with most of the new oil supply originating from US suppliers as Russia faces continued sanctions and OPEC+ remains subject to their multilateral production agreement.

10. DECEMBER JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 223,000 jobs in December while the unemployment rate declined slightly to 3.5%.
• In 2022, leisure and hospitality occupations, the most impacted by the pandemic, were added at an average of 79,000 per month, significantly lower than 2021’s average of 196,000 per month. Employment in the industry remains 5.5% below pre-pandemic levels.
• Healthcare employment increased by 55,000 in December, construction employment increased by 28,000, and social assistance added 20,000 jobs in December.
• Employment in retail, manufacturing, professional and business services, government, and transportation/ warehousing were little changed.
• Average hourly earnings for all private nonfarm payroll employees rose 0.3% month-over-month. Over the past 12 months, average hourly earnings have increased by 4.6%.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (2) https://www.newyorkfed.org/microeconomics/sce#/
• (3) https://www.uhaul.com/Articles/About/U-Haul-Growth-States-Of-2022-Texas-Florida-Top-List-Again-28337/
• (4) https://www.housingwire.com/articles/2023-real-estate-investing-approach-with-caution/
• (5) https://cre.moodysanalytics.com/insights/cre-trends/from-location-to-labor-industrials-newesttrends/
• (6) https://www.nfib.com/surveys/small-business-economic-trends/
• (7) https://www.the-lmi.com/
• (8) https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf
• (9) https://www.worldbank.org/en/publication/global-economic-prospects
• (10) https://www.bls.gov/news.release/empsit.nr0.htm