SVN | Research Economic Update 7.12.2024

1. CPI INFLATION

• The Consumer Price Index fell by 0.1% month over month in June, its first monthly downtick in over four years, according to the latest data from the Bureau of Labor Statistics.
• Prices continue to climb annually, rising 3.0% year-over-year, but slowed, falling from an annual increase of 3.3% in May.
• Falling gasoline prices helped put downward pressure on overall prices, offsetting much shallower increases in food and shelter prices. Notably, shelter prices have remained a persistent factor behind inflation pressures, and while they were still an upward factor to inflation during this month’s report, the recent slowdown in shelter prices is a welcomed sign.
• Core-CPI, which excludes food and energy prices, continued to increase monthly, climbing 0.1% from May. However, core prices climbed by their slowest annual pace of inflation since April 2021, rising 3.3% from one year ago.

2. FOMC MEETING MINUTES

• According to minutes of the Federal Reserve’s June policy meeting, officials indicated that while inflation is heading in the right direction, greater confidence is needed before beginning rate cuts.
• There was a greater degree of disagreement among policymakers relative to the previous meeting, with some indicating a willingness to raise rates again to re-anchor inflation expectations. Others emphasized the need for the Fed to stand ready should any unexpected weakness emerge in the US economy.
• Officials continued to emphasize that they would not lower rates before more data emerged that gave them greater confidence that inflation was cooling. This signaled that the most recent mix of macroeconomic data at the time of the meeting had yet to reasonably shift their overall confidence.

3. CRE CONDITIONS & SENTIMENT: Q2 2024

• The latest edition of Altus Group’s quarterly survey on commercial real estate conditions and sentiment showed a slight rise in recession concerns among respondents alongside expectations that the financing environment will remain challenging. Still, expectations for income growth improved, and distress is expected to fall over the next 12 months.
• The survey respondents, who come from a mix of organization types and functions, expect financing costs to continue increasing marginally over the next 12 months, alongside a decrease in net returns to equity. On the one hand, more than a third of respondents expect capital availability to increase in the next year, but a slightly higher share expects the cost of capital to grow over the same period.
• Many expect to remain focused on de-risking in the coming quarters, with capital expenditures expected to stabilize relative to the past 12 months. The continued focus on de-risking comes alongside a slight uptick in recession concerns compared to the previous quarter.
• However, a plurality of respondents (49%) do not anticipate a recession in the short term. More notably, those who identified as having a ‘core strategy’ remain the least expectant of a recession within the next six months, while respondents deploying more opportunistic strategies tended to view the near term with more pessimism.
• Generally, participants expect revenue and NOI growth to be stable over the next 12 months, while 72% of respondents expect CRE distress to fall over the same period.

4. INVESTORS EYE OFFICE MARKET BARGAINS

• Distress signals have become an increasing focus as close to $1 trillion of commercial real estate debt is set to mature this year under a fundamentally different post-pandemic office sector. However, some well-positioned investors are focused on the opportunity to scoop up bargains amid the frenzy.
• According to Bloomberg’s reporting on data compiled by Prequin, private equity firms have set aside an average of 64% of their dry powder to invest in office properties.
• As traditional Office market lenders pull away from CRE amid higher interest rates and falling values, a credit availability gap is widening, presenting opportunities for alternative investors. PGIM estimates that there’s a gap of roughly $150 billion between the volume of loans coming due and credit availability from traditional lenders.
• While the structural fundamentals that underlie recent trends in CRE valuations are still salient to investors’ outlook, the opportunity to snap up bargains during the current downcycle remains attractive to those with lower barriers to financing.

5. JUNE JOBS REPORT

• According to the Bureau of Labor Statistics (BLS), the US economy added 206,000 jobs in June, beating the consensus forecast of 200,000 but a downtick from May’s 218,000 job adds.
• The unemployment rate rose to 4.1% during the month, its highest rate since October 2021. The previous month’s robust jobs report was notably revised downward from the initial 272,000 reported. The data will weigh heavily on the Fed’s upcoming policy decisions as officials look for persistent signs of inflation pressures cooling before moving to cut rates.
• The labor force participation rate, which measures all working-age adults who are either employed or looking for work, rose during the month to 62.6%. The concurrent rise in unemployment signals that working-age adults who are out of the labor force are being encouraged to re-enter. The broader unemployment rate, which includes discouraged workers and those who are part-time for economic reasons, held steady from May.
• Annual wage growth rose by 0.3% month over month and 3.9% from one year ago, each in line with the consensus estimate.

6. LOGISTICS MANAGERS’ INDEX

• According to the Logistics Managers’ Index, US logistics activity expanded for the seventh consecutive month in June but slowed as inventories fell and warehousing utilization dropped.
• Inventory levels fell for the second consecutive month, simultaneously slowing inventory cost inflation and overall warehousing utilization. Meanwhile, warehousing and transportation capacity fell out of expansion for the first time since March 2022, which was notably the final month preceding a prolonged freight downturn.
• The tightening of transportation capacity led to an increase in transportation prices, which now sit at their highest level since September 2022. Considering the trend of transportation prices expanding at a faster rate than transportation capacity in recent months, an expected upcoming seasonal peak could end a more than two-year freight recession.

7. CONSTRUCTION SPENDING

• US construction spending fell by 0.1% from the previous month in May, the latest month of data availability from the US Census Bureau. The increase in spending charted below consensus estimates and follows a 0.3% increase in April. Construction spending is up 6.4% year-over-year.
• The private spending segment of the market fell by 0.3% month-over-month, led by a decline in non-residential construction, particularly educational (-3.4%), religious (-2.9%), and healthcare (-2.2%). Residential construction also fell, down 0.2% from the previous month, led by a 0.7% drop in single-family projects.
• Public construction spending rose by 0.5%, led by a 2.6% increase in residential construction spending and a 0.4% rise in non-residential spending.

8. NFIB BUSINESS OPTIMISM

• According to the latest report from the National Federation of Independent Businesses, small business optimism in June reached its highest level since December 2023, rising to an index level of 91.5.
• Despite the increase, the index remains below its historical average of 98, while the report’s analysts note that, overall, Main Street businesses largely remain pessimistic about the economy this year.
• The share of small business owners reporting job openings that they could not fill fell five points from May. Still, more than eight in ten owners who are actively hiring continue to struggle to find qualified applicants to fill their positions.
• A smaller share of owners reported capital outlays in the last six months than the previous month, while a net negative 12% of owners reported higher nominal sales over the past three months.
• The frequency of reports of positive profit trends stood at a net negative 29% (seasonally adjusted) in the June report, a slight improvement from May but still underwhelming. 34% of small business owners reporting lower profits blamed weaker sales, 17% blamed material cost increases, 12% cited labor costs, and 9% indicated lower selling prices.

9. BANK CRE LOAN PERFORMANCE

• According to a Trepp analysis using anonymized loan-level repository data, commercial mortgage origination volumes for bank-held CRE loans fell in Q1 2024, decreasing to a total of $3.2 billion from $4.0 billion in Q4 2023.
• Metrics measuring loan performance, such as net charge-offs, delinquency rates, and occupancy rates, largely reflected higher levels of distress in CRE lending.
• The industrial sector is experiencing the lowest quarterly average in origination volume relative to its pre-COVID average compared to all other sectors, down by 82% from 2019. The office sector is experiencing the second-largest decline relative to pre-COVID levels, down by 73%.

10. Q3 2024 GLOBAL ECONOMIC OUTLOOK

• A new report by Capital Economics suggests that while the global economy continues to face headwinds in its recovery, some of the most adverse effects of the post-pandemic inflation surge appear to be subsiding, possibly allowing central banks to begin shifting towards a relatively looser stance in the near future.
• The report notes that GDP picked up in Europe and several emerging markets to begin 2024, which lagged the United States in the initial post-COVID recovery over the past few years while also contending with high inflation.
• Recent falls in inflation have boosted real incomes in most economies. Meanwhile, labor markets remain resilient with relatively low unemployment rates amid supportive fiscal policy regimes.
• The report also notes that there is little sign that higher interest rates will have a lagged recessionary effect on a global stage. It notes that lending standards have tightened across the board over the past two years, with credit conditions, delinquency rates, and consumer confidence levels each moving in relation. However, despite these shifts, growth has remained resilient in most economies.
• Capital economics projects that by the middle of 2025, 20 of the most 30 major central banks will be cutting interest rates, which will have a stimulating effect in most economies throughout next year.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (2) https://www.federalreserve.gov/monetarypolicy/fomcminutes20240612.htm
• (3) https://www.altusgroup.com/insights/cooling-economy-lifts-us-recession-expectations-modestly/
• (4) https://www.benzinga.com/top-stories/24/07/39720428/distressed-investors-see-exceptional-bargains-in-troubled-us-commercial-real-estate-sector
• (5) https://www.bls.gov/news.release/empsit.nr0.htm
• (6) https://www.the-lmi.com/
• (7) census.gov/construction/c30/current/index.html
• (8) https://www.nfib.com/surveys/small-business-economic-trends/
• (9) https://www.trepp.com/instantly-access-q1-2024-tallr-report?submissionGuid=22782548-44a3-4686-8f80-32a78f168470
• (10) https://www.capitaleconomics.com/global-economy-outlook

1. INTEREST RATES

The Fed’s preferred inflation gauge

• The FOMC voted to leave rates unchanged at its June policy meeting, which aligned with market expectations. On Wednesday, markets braced for the convergence of May’s Consumer Price Index data, which arrived just a few hours before the Federal Reserve’s June policy decision, where policymakers voted to hold interest rates in place.
• Driving the Fed’s decision is a cautiousness about a policy pivot, as while inflation pressures and expectations have come down, they remain above the Fed’s preferred 2% target necessitating a wait and see approach.
• National economic data preceding the Fed meeting showed the US economy and labor market continued expanding. According to the Federal Reserve’s May 29th Beige Book, most Fed Districts report slight or modest growth during the six-week survey period, though two noted no change. Meanwhile, May’s job report from the Bureau of Labor Statistics reported that 272,000 jobs were added in the month, sharply beating expectations.
• According to the Chicago Mercantile Exchange’s Fed Watch tool, two rate cuts remain on the docket this year. However, all will depend on the path of inflation and expectations throughout the second half of the year.

2. SUMMARY OF ECONOMIC PROJECTIONS

• According to the FOMC’s latest summary of economic projections, released at the Fed’s June policy meeting, policymakers see just one rate cut between now and the end of 2024.
• After leaving interest rates steady at 5.25%-5.50% for the seventh consecutive meeting in June, the FOMC’s dot plot showed that policymakers see only one rate cut this year and four in 2025. Projections shifted from the Fed’s last release in March when the dot plot coalesced around a projection of three rate cuts in 2024, followed by another three in 2025.
• Notably, the Fed’s projections differ from those gathered from Fed futures markets, which still forecast two rate hikes in 2024 following the release of the Fed’s latest projections.
• The Fed made no revisions to GDP growth projections and still sees the economy expanding by 2.1% in 2024, 2% in 2025, and 2026. The projection for PCE inflation was revised to 2.6% in 2024, while that for Core PCE inflation was revised to 2.8% in 2024.

3. CONSTRUCTION SPENDING

• US Construction spending fell by 0.1% month-over-month in April 2024, following a 0.2% decrease in March. However, construction spending grew by 10% annually.
• Markets forecasted an increase of 0.2%; however, both private and public spending shrank in April, falling by 0.2% and 0.1, respectively.
• In the public segment, both residential (-0.3%) and non-residential (-0.2%) experienced a decrease during the month. Within the private segment, there was a 0.3% decline in the non-residential, while primarily amusement and recreation fell by -3.5%. The educational segment fell by -3.1% and healthcare by -2.9%. Conversely, the residential segment rose by 0.1%, with spending on single-family projects increasing by 0.1%. Meanwhile, outlays on multifamily housing projects fell by 0.3%.

4. INVESTORS TAKE ON CRE

• A recent Bloomberg review of investor sentiment examines investors’ more candid views on the state of Commercial Real Estate, as the industry remains strong amid a number of emerging risks.
• Standing out is the longer-term risk of higher interest rates. Early on during the Fed’s tightening cycle, there was hope—and market expectation—that interest rates would rise for some initial period of time before coming back down as inflation snapped back toward pre-pandemic levels. However, this hasn’t happened, leaving interest rates higher for longer than some had expected and forcing some shifts in investment strategies.
• CRE assets, which often require refinancing after long loan periods, are susceptible to the recent increases in lending rates, especially those in sectors and places strongly altered by the pandemic, such as downtown office spaces.
• Notably, one take in the article noted that as Fed policymakers keep an eye on CRE risks, they face the reality that the shifts in certain parts of the market largely reflect a secular supply and demand shift caused by the COVID-19 pandemic. As a result, there is so much that monetary policy can sustainably do to address the risks posed.

5. FORECLOSURES RISE

• Data from ATTOM shows a nationwide uptick in foreclosures in May compared to the month before but that foreclosures are down on an annual basis.
• There were roughly 33,000 foreclosure filings in May, up 3.0% from April but down 7.0% from May 2023. The trend signals a mixed market, with pockets of distress emerging in a relatively resilient landscape.
• New Jersey, Illinois, and Delaware posted the highest monthly foreclosure rates. From a metro-level perspective, Chicago, Philadelphia, and Riverside (CA) led foreclosure filings in cities with populations of 1 million or higher. In cities with populations between 200,000 and 1 million, Longview, TX, Trenton, NJ, and Atlantic City, NJ, charted the highest rates of foreclosures.

6. HOME PRICE EXPECTATIONS

U.S. Home Price Expectations, Fannie Mae

• According to Fannie Mae’s Q2 2024 Home Price Expectations Survey (HPES), produced in collaboration with Pulsenomics, home price growth is expected to remain robust through 2025.
• The HPES forecasts that US home prices will finish 2024 up 4.3% before slowing to 3.2% in 2025. These projections come off the heels of data from Core-logic in May showing that the nation’s 20 largest metros experienced a record 6.5% annual through March.
• Further, special reporting in Fannie’s analysis details that the “lock-in effect” may be fading. As mortgage rates rose to generational highs, the housing market began to experience a “lock-in effect” where existing homeowners locked into older contracts that were, on average, underwritten with lower interest rates became increasingly incentivized to stay out of the for-sale market.
• Citing data from Realtor.com, newly listed homes are up 12.2% since the start of the year through April. 84% of respondents in the HPES believe that the lock-in effect will continue to diminish and bring more would-be buyers and sellers into the market.

7. CPI INFLATION

• According to the US Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) remained steady in May after increasing by 0.3% in April. The consumer price index fell slightly on an annual basis, ticking down to 3.3%, a positive shift relative to earlier in the year but still not enough to sway Fed policymakers further toward rate cuts.
• Core CPI rose by 0.2% in May, its slowest pace since October 2023. Meanwhile, shelter costs rose 0.4% month-over-month, their fourth consecutive month at that level. Gasoline prices fell.
• Overall, markets viewed this month’s report positively, hoping that rate cuts could be on the way with inflation decelerating.
• Still, with policymakers holding rates constant at their June meeting later that day, by the end of the trading day, federal funds futures priced in just two rate cuts between now and the end of the year. The forecast is a significant shift from the three-rate hikes projected as the year began, but markers have gradually recalibrated expectations as inflation pressures persisted.

8. SECOND QUARTER CONSTRUCTION INSIGHTS

• According to data from CoreLogic, Southern states have led the US in building permit approvals for single-unit homes through the second quarter of 2024, with Texas and Florida as key standouts.
• Construction cost growth was similarly higher in the South, coinciding with solid building permit activity. Overall, residential reconstruction costs rose roughly 3% from January to May 2024.
• The price activity for materials In the US has been mixed, with only half of all materials tracked in the report reflecting increases while the rest decreased. Notably, lumber prices have declined by up to 3%, while carpet and clay bricks have risen more than 6.0%.
• Labor costs have also gone up. Through May 2024, roofers, electricians, and painters are each experiencing wage growth above 2% annually. Laborers and insulation installers had the lowest wage growth, but all occupations saw wage growth of at least 1%.

9. CMBS DELINQUENCIES

CMBS Deliquency Rates, Tepp

• According to Trepp, in May 2024, the overall CMBS delinquency rate fell below 5% to 4.97%, driven by significant resolutions in the office sector. Approximately $2 billion in office loans were resolved, reducing the overall delinquency rate.
• However, the impact was offset by $1.2 billion in newly delinquent office loans and new delinquencies in Retail ($995 million), lodging ($238 million), and multifamily ($245 million). Including loans beyond maturity but current on interest, the delinquency rate would be 6.00%. The 30-day delinquency rate rose to 0.35%.
• CMBS delinquency rates remain highest for office properties (6.94%). Lodging (6.22%) and Retail (5.94%) follow closely behind with delinquency rates in the same stratosphere. However, while the retail delinquency rate remains elevated, Retail is the lone sector to have seen improvement in the past year, falling from 6.67% twelve months ago. Multifamily and industrial continue to see the lowest CMBS delinquency rates through May, holding at 1.70% and 0.50%, respectively.

10. MAY JOBS REPORT

• According to the Bureau of Labor Statistics (BLS), the US economy added 272,000 jobs in May, sharply beating the consensus forecast of 185k. However, the unemployment rate rose to 4.0 during the month.
• Employment increases were led by education and healthcare (+86k), government (+43k), and leisure and hospitality (+42k). Construction employment increased by 21,000 during the month.
• Annual wage growth picked up substantially, rising to 4.1% in May, potentially adding to inflation pressures.
• Meanwhile, US job openings dropped to 8.1 million in April, their lowest in over three years, potentially indicating a labor market slowdown. The unemployed-to-job opening ratio decreased to 0.68 — which is still well below 0.93 before the pandemic.

 

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
• (2) https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240612.pdf
• (3) https://www.census.gov/construction/c30/c30index.html
• (4) https://www.bloomberg.com/news/newsletters/2024-06-11/fed-s-higher-for- longer-rates-start-to-bite-on-commercial-real-estate
• (5) https://www.attomdata.com/solutions/market-trends-data/foreclosure-activity-report/
• (6) https://www.fanniemae.com/research-and-insights/surveys-indices/home-price-expectations-survey-hpes
• (7) https://www.bls.gov/news.release/cpi.nr0.htm
• (8) https://www.corelogic.com/construction-cost-update/
• (9) https://www.trepp.com/trepptalk/topic/cmbs-delinquency-rate
• (10) https://www.bls.gov/news.release/empsit.nr0.htm

1. LARGE FUNDS INCREASE CRE FOOTPRINT

• A recent analysis by Reuters details how large funds are increasing their CRE market share as traditional lenders such as banks pull back.
• Stricter capital rules for banks and recent regional bank failures in the US have led to a retreat from traditional lenders in the real estate space, increasing demand for alternative lenders.
• Large firms such as PGIM, LaSalle and Nuveen, and Brookfield, among others, recently expressed their plans to increase their credit exposure to property markets as they bet on an end to the recent decline in real estate prices.
• Logistics, data centers, multifamily apartments, and high-end office properties are garnering the most attention from funds looking to expand their footprint.

2. FORECLOSURES FALL

• According to the latest data tracked by ATTOM, nationwide foreclosure activity fell slightly in April after increasing in March.
• US foreclosure filings, which include default notices, scheduled auctions, or bank repossessions, are down 4.0% month-over-month and an equivalent decline from one year ago.
• Maryland, Illinois, and Nevada posted the highest foreclosure rates in April, while Cleveland, Baltimore, and Chicago posted the highest rates among major US metros.
• To further contextualize the market’s direction, ATTOM’s report shows that foreclosure starts fell by 7.0% during the month while foreclosure completions rose by 8.0%. If the trend holds, foreclosures may remain elevated in the short term before dropping off.

3. LOGISTICS MANAGERS’ INDEX

• Cell phone activity data tracked by the University of Toronto School of Cities show that between March 2023 and March 2024, downtown US and Canadian cities saw a median increase of 9.3% in foot traffic.
• While the findings do not detail the type of places where new activity occurs, they suggest that most downtown areas continue to gradually recover from the pandemic.
• Of the metros tracked, 50 cities have downtown areas experiencing a recovery compared to 14 that are trending downward.
• Notably, the report points out that among the metros trending downward are cities that had previously topped their rankings, suggesting that many of them recovered more quickly.
• The top five metro areas by year-over-year downtown activity growth were Minneapolis (+45.7%), Ottawa (+39.5%), Montreal (+38.6%), Chicago (+36.6%), and Louisville (+31.9%).

4. CMBS DELINQUENCIES SPIKE

• According to Trepp data, the CMBS delinquency rate spiked in April, climbing 40 basis points to 5.07%, its highest rate since September 2021.
• The uptick reversed a slight decrease registered during the previous month and was driven mainly by increases in office, lodging, and retail delinquencies, each experiencing their most significant monthly increases in almost a year.
• Further, over a dozen loans with outstanding balances exceeding $100 million became delinquent during the month.
• Industrial and Multifamily experienced a slight month-over-month decline in delinquencies during April, with each reversing increase in March.

5. RETAIL FOOT TRAFFIC REBOUND

• A recent analysis of data from Forrester suggests that lease negotiations in the Retail real estate sector are occurring at earlier points in advance of lease expirations compared to previous years, shifting the market in favor of landlords and likely a bullish signal for asset prices.
• Offline sales rose by 78.1% in 2022 as nationwide in-person activity rebounded from pandemic lows and remained robust in 2023. Foot traffic in prime trade areas is expected to return to pre-pandemic levels in the third quarter of this year and surpass them in 2025.
• The report notes that several downtown shopping districts continue to be hampered by increased crime rates and declines in office attendance, but rents for prime retail space are up 9% in US markets compared to 4.8% globally.
• Moreover, while online sales have become an increasingly influential part of the overall retail market, the report estimates that brands with a physical location increase their digital sales by an average of 6.9% while closing stores depress sales.

6. CPI INFLATION

• Inflation, as measured by the Consumer Price Index (CPI), experienced a slight easing in April following three consecutive months of increases or unchanged rates on a monthly basis, according to the latest data from the Bureau of Labor Statistics.
• CPI rose 3.4% over the past 12 months, roughly aligned with expectations. Meanwhile, core inflation rose 3.6% annually, its lowest reading since April 2021.
• While the relief in price pressures will be a welcome sign from Federal Reserve policymakers, inflation in April was primarily driven by rises in shelter and energy.
• Shelter costs have been a critical focus of policymakers, given their significant contribution to price pressures over the past several years. The shelter index of CPI rose by 0.4% month over month and 5.5% year over year, well above the levels needed to drive inflation back down to 2%.

7. REPUBLIC FIRST FAILURE

• According to a recent analysis from Commercial Observer, Republic First’s recent bank failure will have a limited impact on CRE markets.
• The Philadelphia-based bank, which finished 2023 with $5.87 billion in total assets, was shut down by Pennsylvania regulators in April. This renewed concerns over the instability of the banking system that began one year ago following the failures of three regional banks: Silicon Valley Bank, Signature Bank, and First Republic.
• Sam Chandan, director of NYU’s Chen Institute for Global Real Estate Finance, suggests that the failure will have limited impact on real estate portfolios where the bank operated. Still, Chandan notes that the market remains “particularly sensitive to signals of instability” and that recent attention toward the bank failure may be more noteworthy than the failure itself as markets work to “discern whether or not the failure has a bearing on or is relevant to our thinking about broader bank stability.”
• Republic First’s assets and deposits were acquired by Fulton Financial Corp, a Lancaster, PA-based bank, in an action overseen by the FDIC.

8. INTEREST RATES

• The FOMC held interest rates unchanged at its April 30th-May 1st policy meeting, the seventh time in its last eight meetings that it decided to do so. The Federal Funds rate is currently set to 5.25% to 5.5%.
• The decision continues the committee’s “wait-and-see” approach, which has seen Fed policymakers move away from actively raising interest rates and toward a more moderate stance that digests month-to-month inflation dynamics before signaling the direction of rates moving forward.
• The committee’s latest decision to hold comes on the heels of higher-than-expected inflation rates in recent months, including a 3.5% year-over-year uptick in the Consumer Price Index in March.
• Further, recent Q1 GDP data suggests that consumer spending has remained elevated since the start of 2024, potentially sustaining price pressures even as interest rates sit at generational highs.
• At the beginning of this year, consensus estimates predicted three quarter-percent rate cuts in 2024 beginning in March, which have moderated in recent months as Fed officials cautioned against a premature pivot and the US economy continues to expand at an impressive pace. Through May 15th, the majority of futures markets now see just two quarter-percentage points cuts in 2024.

9. APRIL JOBS REPORT

• According to the Bureau of Labor Statistics, nonfarm payrolls rose by 175,000 in April, below consensus estimates, and a significant slowdown in hiring activity was seen at the start of the year.
• April’s job numbers were the slowest pace of hiring in six months and coincided with a ten basis point increase in the unemployment rate to 3.9%. Meanwhile, wage growth eased, with average hourly earnings falling below a 4% annual pace for the first time since June 2021.
• Despite the slowdown in hiring, the US labor market appears to be on solid footing as initial unemployment claims remain at moderate levels.
• April’s slowdown may give the Federal Reserve some breathing room. Officials are monitoring leading indicators such as employment growth in hopes that inflation can return to its longer-run target of 2%.

10. CONSUMER SENTIMENT

• Consumer sentiment fell in May to its lowest level in six months, according to preliminary data from the University of Michigan.
• Both the sub-indices measuring current conditions and expectations declined during the month, with consumers expressing worries that inflation, unemployment, and interest rates may each be heading in an unfavorable direction.
• Inflation expectations for the next twelve months rose to 3.5%, up from 3.2% in April and a six-month high. The five-year inflation outlook also rose to a six-month high at 3.1%.

 

SUMMARY OF SOURCES

• (1) https://www.reuters.com/business/finance/big-name-funds-pile-into-real-estate-debt-banks-retreat-2024-05-14/
• (2) https://www.attomdata.com/news/most-recent/attom-april-2024-foreclosure-report/
• (3) https://www.the-lmi.com/
• (4) https://www.trepp.com/hubfs/Trepp%20Delinquency%20Report%20April%202024.pdf?hsCtaTracking=03884b32-230d-472e-8f5c-c9cccc9dfdec%7C3c2e1c3e-d6f4-41bf-822a-67fcaebfcb46
• (5) https://www.globest.com/2024/05/16/retail-foot-traffic-to-match-pre-pandemic-levels-this-year/
• (6) https://www.bls.gov/news.release/cpi.nr0.htm
• (7) https://commercialobserver.com/2024/04/cre-markets-limited-impact-republic-first-bank-failure/?utm_source=linkedin&utm_medium=newsletter&utm_campaign=Fallout+From+Republic+First&utm_content=SFR+A-OK
• (8) https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm
• (9) https://www.bls.gov/news.release/pdf/empsit.pdf
• (10) http://www.sca.isr.umich.edu/

 

---

---

 

SHAREABLE FLIPBOOK                                                                                  DOWNLOADABLE PDF

 

---

---

1. HOMEBUYERS ADJUSTING TO HIGHER INTEREST RATES

• A new survey by Fannie Mae suggests that home buyers are gradually adjusting to higher mortgage rates despite increasingly negative sentiments about the housing market.
• Fannie Mae’s Home Purchase Sentiment Index dropped in March for the first time since November, primarily driven by mortgage rates that remain near generational highs despite expectations last fall that rate-cute could be on the horizon.
• While the delay of rate cuts is likely fueling pessimism, underneath these data, consumers appear to be recalibrating their expectations around interest rates.
• Data from the survey show that the measurements for questions asking if it’s a “good time to buy” or a “good time to sell” both moved higher, suggesting that the higher rate environment is starting to be seen as a “new normal” by both buyers and sellers.
• Still, while responses moved in a positive direction, most consumers (80%) still say now is a bad time to buy a house. However, this suggests that even a slight reduction in interest rates could bring buyers and sellers off the sidelines.

2. WHY HAVEN’T RATE HIKES REDUCED SPENDING?

• While the Federal Reserve’s interest rate hikes have successfully reigned in borrowing by households and businesses, it has not meaningfully reduced consumer spending or output—the critical mechanism policymakers rely on to calm inflation pressures.
• In a recent analysis, economist Matthew C. Klein suggests that this is explained in part by consumers’ reduced reliance on debt in the aftermath of the Great Financial Crisis (GFC)
• As financers recalibrated their credit standards post-GFC, new spending became increasingly financed by income growth rather than debt reliance relative to before the GFC.
• Incomes have grown rapidly during pandemic and post-pandemic years while balance sheets remain healthy as increasing asset values reduce the strain of rising debt servicing costs.
• Klein points out that today’s spending activity has been financed mainly by more people working and at higher pay rates. This both reduces the potential impact of rising interest rates on consumption levels and suggests that spending levels are sustainable relative to employment.

3. LOGISTICS ACTIVITY SURGES, FASTEST IN 19 MONTHS

• According to the Logistics Managers’ Index, US logistics activity experienced its fastest monthly expansion since September 2022 during March, reaching an index level of 58.3.
• While growth levels remain at the lower end, this signals a healthy turnaround for industries that impact warehousing and transportation. According to the report, recent growth is attributed to “long-planned inventory expansions and improved efficiency in warehousing and transportation.”
• An increase in inventory levels drove the overall expansion in the index in March as inventories reached their highest mark since October 2022.
• Consequently, warehouse capacity contracted, its first since January 2023. Absorption of warehouse capacity is a sign of strengthening demand, a bullish signal for the Industrial real estate market.
• Nonetheless, transportation prices continue to outpace capacity, indicating that we may still be in the midst of a freight recession.
• Overall, the analysis notes that recent data suggests that firms are gearing up for a continuation of strong consumer spending levels in the future.

4. HAS OFFICE ACTIVITY REACHED ITS FLOOR?

• A recent Moody’s review of Placer AI data reports that while employee office visits fell by 31.3% between February 2020 and February 2024, they have risen by 18.6% over the past 12 months. Whether or not office activity has reached its floor may have important implications for office valuations.
• In the San Francisco metro, where office buildings have experienced the most extensive post-pandemic drop-in activity (-46%), visits have rebounded by 24% compared to February 2023, the second largest increase nationally, behind Dallas.
• However, when comparing the Placer AI data with their own commercial real estate insights, Moody’s finds that higher visits do not necessarily translate into higher occupancy rates in the short term but do so over more extended periods of analysis.

5. CPI INFLATION

• Consumer prices increased more than expected in March, rising 0.4% from February and 3.5% year-over-year, according to the latest data from the Bureau of Labor Statistics.
• On average, economists surveyed by Dow Jones forecasted monthly and annual inflation rates of 0.3% and 3.5%, respectively. Futures markets fell following the report while US Treasury yields rose.
• The core Consumer Price Index (CPI), which excludes food and energy, also rose by 0.4% in the month but accelerated faster than headline CPI on an annual basis, increasing by 3.8% from one year ago.
• Shelter costs rose 0.4% from February and 5.7% year-over-year. The Shelter component of CPI has been one of the most stubborn sources of inflation pressures throughout the post-pandemic period. Fed policymakers are keen to see shelter cost pressures decelerate before moving forward with a policy pivot.

6. FOMC MEETING MINUTES

• Minutes from the FOMC’s March policy meeting reflect that officials remain cautious about the timing of a potential policy pivot, noting that inflation rates weren’t moving lower quickly enough.
• The committee held the benchmark federal funds rate unchanged at its latest meeting in March, continuing its wait-and-see approach regarding any decision to begin rate cuts.
• Comparing language from the March meeting minutes with those from the previous meeting in January, officials again expressed that they need to have “gained greater confidence” that inflation was on a path towards their 2% targeting before cutting rates.
• At the time of the meeting, the US economy had come off of back-to-back higher-than-expected inflation readings in January and February. Since the Fed’s March meeting, consumer prices have again charted higher than estimates suggested, validating officials’ concerns about recent trends.
• Officials also cited geopolitical turmoil and rising energy prices as persisting inflation risks.

7. SUMMARY OF ECONOMIC PROJECTIONS

• In The FOMC’s latest Summary of Economic Projections, policymakers kept the end-of-year federal funds and PCE inflation rate forecasts constant. Still, they shifted their projections on 2024 growth, the year-end unemployment rate, and core inflation rates.
• FOMC officials project that the federal funds rate will fall to 4.6% by year’s end, which aligns with December’s forecast. The current federal funds rate stands at 525-550 and would require three quarter-rate cuts in 2024 to reach the committee’s projection by the end of the year.
• Helping explain the static interest rate forecast is a similarly unchanged projection for headline inflation, which the committee expects to fall to an annual rate of 2.4% by the end of the year.
• However, policymakers have become slightly more hawkish on core inflation since their last projections to close 2023. In the latest reading, projections for core-PCE were raised from 2.4% to 2.6%.
• Higher economic growth forecasts help explain the uptick in core-rate projections—projections for real GDP at the end of 2024 are up from 1.4% to 2.4%. Consequently, officials expect the unemployment rate to fall more steeply this year, revising their projection down by ten basis points to 4.0%.

8. CONSTRUCTION SPENDING

• According to data from the US Census Bureau, construction spending fell by 0.3% month-over-month and increased by 10.6% annually in February, the latest reporting month.
• The drop follows a 0.2% decline in January and surprised forecasters who projected a 0.7% increase during the month.
• The decline was led by a 1.2% fall in public construction spending, while private construction spending was mostly unchanged.
• Within private construction, the residential segment rose 0.7%, but this was offset by a 0.9% decline in nonresidential construction spending.

9. MARCH JOBS REPORT

• Job growth soared past economists’ consensus expectations in March as employers added 303,000 new positions, the largest monthly tally since May last year.
• The historic post-pandemic trend in US job growth has defied many expectations, with many who thought that by now, the pandemic recovery would be finished and job growth would have slowed to its pre-pandemic trend.
• Nonetheless, the US labor market has remained resilient amid 11 interest-rate hikes and stubbornly elevated inflation. The unemployment rate ticked down ten basis points to 3.8% in March.
• Annual wage growth softened from 4.3% in February to 4.1% in March. The trend will be welcomed by Federal Reserve policymakers looking for a decline in inflation’s leading indicators, of which employee wages constitute a significant part.

10. BLACKSTONE GOES ON INVESTMENT “OFFENSIVE”

• The Wall Street Journal (WSJ) recently reported on a deal by Blackstone to purchase Apartment Income REIT (AIR Communities) for upwards of $10 billion.
• The deal is significant in that it is the largest Multifamily market transaction in the firm’s history and reflects bullish sentiments by larger firms on commercial real estate more broadly.
• In addition to positive investment sentiment about the rental housing market, the report suggests that Blackstone believes that commercial real estate may be reaching its cyclical floor, making now a good time to buy.
• Referencing data from Commercial Mortgage Alert, WSJ notes that while real estate transaction activity has cratered in the past year, CMBS issuance during Q1 2024 was roughly three times (3x) the volume in Q1 2023. Remerging bullishness in the CMBS market could indicate an improving outlook for the broader financing market. Still, much depends on the future path of interest rates.

 

SUMMARY OF SOURCES

• (1) https://www.investopedia.com/us-economy-news-today-april-8-8628199#toc-2024-04-08t182001942z
• (2) https://substack.com/@matthewcklein?utm_source=substack&utm_medium=email
• (3) https://www.the-lmi.com/
• (4)https://cre.moodysanalytics.com/insights/cre-news/relationship-between-office-visits-and-occupancy/
• (5) https://www.bls.gov/news.release/cpi.nr0.htm
• (6) https://www.federalreserve.gov/newsevents/pressreleases/monetary20240320a.htm
• (7) https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm
• (8) https://www.census.gov/construction/c30/c30index.html
• (9) https://www.bls.gov/news.release/pdf/empsit.pdf\
• (10) https://www.wsj.com/real-estate/blackstone-making-10-billion-multifamily-purchase-going-on-the-real-estate-offensive-f3126928

 

1. CURRENT ECONOMIC CONDITIONS (BEIGE BOOK)

• According to the March 6th, 2024, release of the Federal Reserve’s Beige Book, national economic activity increased over the previous six-week period.
• Eight of the twelve Federal Reserve districts reported slight to modest growth; three indicated soft growth, while one indicated a slight softening of growth.
• Consumer spending ticked down in recent weeks, led by a decline in the sale of retail goods. Further, consumers appear more price-sensitive and have shifted spending away from discretionary goods.
• Air travel was robust during the six-week period, while demand for restaurants, hotels, and other establishments softened as prices entered a seasonal uptick.
• Manufacturing activity was little changed while supply bottlenecks normalized. Delivery delays for electrical components and ongoing disruptions to the Red Sea and Panama Canal shipping continue but have generally not impacted domestic businesses during the reporting period.
• Demand for residential real estate rose during the period as mortgage rates moderated slightly. Commercial real estate activity was comparatively weak, though new demand for data centers, industrial and manufacturing spaces, and large infrastructure projects was notably robust.

2. CRE MARKET SENTIMENT

• A recent market sentiment survey from Bisnow/CohnReznick on CRE operators’ focus for 2024 covered industry viewpoints on capital markets, asset classes, geography, and operational outlook.
• A majority of respondents (41%) expect to deploy both equity and debt over the next 1-2 years—37.5% plan to finance mostly with debt, while 21.9% plan to finance with equity.
• According to the report, equity capital availability remains high, but winning and approving deals remain challenging. Private liquidity is plentiful, but matching investor preferences and yield opportunity remains challenging.
• Asset class sentiment is in line with the prevailing story, with multifamily and industrial dominating investor attention while the retail and hotel landscape remain favorable by most metrics. Office deals are getting done with much market-by-market variation, while high-quality build-to-rent developments continue to draw investor activity.
• Southeast markets continue to lead the charge nationally, particularly in South Florida, North Carolina, and the Nashville metro.
• Operationally, many CRE operators’ concerns centered around technological hurdles such as analytics and reporting, cybersecurity, and privacy.

3. WHITE HOUSE EFFORTS TO SUPPORT MANUFACTURED HOUSING

• In its recent press release, the White House announced new efforts to construct more residential units and lower housing costs, with a focus on manufactured housing.
• The administration plans to release $225 in funding to create and preserve manufactured housing communities. The Department of Housing and Urban Development (HUD) recently opened applications for grants to support the effort.
• A new FHA program will also be established to support the manufactured housing sector through financing, including increasing Title 1 Manufactured Housing program loan limits.
• According to a Bisnow analysis, demand for manufactured homes has skyrocketed since the pandemic. Nearly 22 million Americans now live in manufactured homes, and new shipments increased from roughly 94k in 202 to 113k in 2022.

4. SHIFTS IN INTEREST RATE FORECASTS

• Uncertainty surrounding US growth, labor markets, and inflation has complicated rate forecasts in recent weeks and recalibrated futures markets into a more hawkish stance than at the start of the year.
• Entering 2024, there was a near-uniform consensus (88.5%) that the FOMC would issue its first rate cut at its March policy meeting. Expectations have greatly adjusted over the past two months, and as of March 14th, futures markets place the likelihood of a March rate cut at just 1.0%.
• Stronger-than-expected labor market data over the past two months and signs that its effect on consumer demand remains robust have induced the hawkish U-turn. During Q4 2023, real US GDP increased at a 3.2% annual pace, while estimates from the Atlanta Fed’s GDPNowcast forecast that the economy will grow at a 2.3% annual pace in Q1 2024.

5. FEBRUARY JOBS REPORT

• According to the Bureau of Labor Statistics (BLS), the US economy added 275,000 jobs in February, beating estimates for the second consecutive month. Still, some labor market observers note that other indicators have signaled a cooling in market activity.
• The unemployment rate rose 20 basis points to 3.9% during the month, its highest rate since January 2022. Initial jobless claims have consistently beat estimates in recent weeks while wage growth has also slowed, a strong indicator of both labor market loosening and underlying inflation pressures. Further, the number of job openings per unemployed persons continues to decline.
• A sharp increase in construction, retail, and food service jobs propelled the higher-than-expected gain during the month while industries that more typically lead the charge, such as health care, leisure and hospitality, and government, continued to post the most significant monthly increases.
• The mixed signals emanating from February’s jobs report are testament to the difficult decisions facing the Federal Reserve ahead: the labor market appears to be moderating, but policymakers need more consistent data to move forward with a shift in interest rate policy.

6. CONSUMER SENTIMENT

• According to the latest estimate, the University of Michigan’s consumer sentiment edged lower in February to 76.9 from 79.0 in January. This largely signals that sentiment has held relatively steady in recent months, as the previous three marks for the index have coalesced around this level.
• Expected business conditions are significantly higher than in the fall of 2023, and all components of the index except for one have exceeded their mid-2021 levels, when, notably, pandemic-reopening efforts boosted sentiment numbers.
• Year-ahead inflation expectations edged higher from an expected 2.9% annual inflation rate to an expected 3.0% annual inflation rate. The subtle shift aligns with broader market forecasts over the past month that have moderated the dovish view that price pressures are behind us and rate cuts are imminent.
• Nonetheless, according to the survey’s analysis, shorter run inflation expectations have fallen to the 2.3%- 3.0% range last experienced between 2018 and 2019.

7. FED’S WALLER DOWNPLAYS CRE CRISIS

• In a late February statement, Federal Reserve Governor Christopher Waller said that while risk in commercial real estate is a concern, distress is emerging gradually and is unlikely to cause a crisis.
• Equity cushions could be substantial enough to bear the brunt of potential losses, while according to Paul Fiorilla of Yardi Matrix, the timeline for this development could take 2 to 3 years.
• Waller described the state of market risks as “predictable” and “manageable” and that banks have been preparing for losses, limiting system exposure to potential losses.

8. SPECIAL SERVICING RATES INCREASINGLY DIVERGE

• CMBS Special servicing rates climbed in January to 6.35% after falling slightly in December. It is the highest mark for the CMBS market since October 2021. However, property type performance remains increasingly mixed.
• Most sectors either sustained or amplified emerging trends, furthering the bifurcation of market performance.
• For example, special serving in the multifamily sector dropped sharply in January following more tepid declines to close to 2023. Similarly, following smaller increases in the prior months the office sector rate increased by 129 points. Altogether, three property types experienced absolute changes of 80 bps or more during the month.

9. CPI INFLATION

• According to the latest update from the Bureau of Labor Statistics, consumer prices rose by 0.4% in February and 3.2% over the past 12 months.
• The core Consumer Price Index (CPI), which excludes the more volatile measures of food and energy, also rose 0.4% monthly while charting a slightly higher 3.8% year-over-year.
• Energy and shelter price increases accounted for more than 60% of the total gain in headline CPI as gasoline jumped 3.8% on the month while the shelter measure increased by 0.4%.
• February’s CPI report could serve as hawkish fodder for policymakers who are concerned that, despite the reduction of price pressures, inflation remains above the Fed’s 2% annual target.

10. EXEMPTING AFFORDABLE HOUSING FROM BOND VOLUME CAPS

• The Federation of American Scientists (FAS) recently looked into the potential for exempting affordable housing projects from volume caps on tax-exempt Private Activity Bonds (PABs).
• The FAS argues that PABs are one of the primary financial tools for building and preserving affordable housing due to their relation to LIHTC financing. It says that lifting caps could speed up the development of badly needed housing.
• Their analysis showed that in 2020, 88% of PAB issuance went to multi- and single-family housing, continuing a decades-long upward trend as affordable housing demand climbs.
• Currently, exceptions exist for activities that contribute to public good, such as critical infrastructure project.

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/monetarypolicy/beigebook202402-summary.htm
• (2) https://www.bisnow.com/national/news/capital-markets/asset-classes-markets-operational-concerns-bisnow-survey-reveals-cre-focus-for-2024-122095?utm_source=outbound_pub_5&utm_campaign=outbound_issue_75125&utm_content=email_mbr_new-york_text-3&utm_medium=email
• (3) https://www.whitehouse.gov/briefing-room/statements-releases/2024/02/29/fact-sheet-biden-harris-administration-announces-new-actions-to-boost-housing-supply-and-lower-housing-costs/
• (4) https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
• (5) https://www.bls.gov/news.release/empsit.nr0.htm
• 6) http://www.sca.isr.umich.edu/
• (7) https://www.nasdaq.com/articles/feds-waller-sees-no-crisis-from-commercial-real-estate
• (8) https://www.trepp.com/instantly-access-january-2024-special-servicing-report?utm_campaign=January%202024%20Special%20Servicing%20Report&utm_medium=email&_hsmi=295088401&_hsenc=p2ANqtz-_uIc1FveREq2CivH0eF3reGTDjbpOyBhGBLR7RPStyIGqwliXmHxn9oe4vscwf-2MuG8VlYSi_ZQVsUbXsSZGY9X_BUg&utm_content=295088401&utm_source=hs_email
• (9) https://www.bls.gov/news.release/cpi.nr0.htm
• (10) https://fas.org/publication/exempt-affordable-housing-from-volume-caps/

1. FOMC INTEREST RATE DECISION

• The FOMC left its benchmark federal funds rate unchanged at its January policy meeting as improving inflation and consumer expectations data has reduced the committee’s need to continue its monetary tightening. Still, the timing of potential rate cuts in 2024 remains uncertain as officials grapple with the complexity of domestic and global economic risks.
• As the inflation picture continued to improve to close 2023, markets increasingly forecasted several Fed rate cuts in 2024. By the final trading day in December, fed futures markets assigned a 74% probability for a March rate cut. However, recent statements of caution by Fed officials and increased global economic uncertainty— notably attacks on commercial shipping in the Red Sea—have made futures markets more hawkish. Currently, fed futures markets forecast an 81.5% probability that rates stay unchanged in March.
• Still, dovish sentiment in the market isn’t unfounded. While the unemployment rate has returned to pre-pandemic levels, it has slowly increased over the past 12 months, with layoffs recently appearing to pick up steam. Over the past few weeks, several notable companies, particularly in the tech and media space, have announced significant layoffs. Initial jobless claims have not seen a meaningful uptick, but quits have declined— evidence of a weakening labor market.
• FOMC members will likely move cautiously through their subsequent interest rate decisions as they weigh these developments and digest incoming inflation data.

2. SENIOR LOAN OFFICER OPINION SURVEY

• In January, the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), which reflected tighter lending standards and weakening demand across several loan types compared to the previous quarter.
• Respondents reported tightening standards and weaker loan demand to commercial and industrial businesses of all sizes, while the commercial and real estate loan market experienced a similar contraction.
• Residential real estate loans of all categories except governmental residential mortgages and government-sponsored enterprise-eligible mortgages saw standards tighten. Banks also reported weaker demand for home-equity lines of credit, while consumer loans, including credit cards and auto loans, also saw tightening standards alongside weakening demand.

3. MORTGAGE RATES AND APPLICATIONS

• According to data from the Mortgage Bankers Association, the average contract on a 30-year fixed-rate mortgage (on balances $726k or less) rose slightly to 6.8% during the week ending on February 2nd, 2024.
• Rates stand at their highest in four weeks but below the 23-year peak of 7.9% in October.
• Despite the uptick, mortgage applications climbed 3.7% during the same week, following a 7.2% decline the previous week.
• Refinance applications accelerated further, rising by 12.6% following a 1.6% increase during the last week of January. Conversely, new home applications dropped 60 basis points week-over-week following an 11.4% decline during the previous week.

4. 2024 HOUSING MARKET PREDICTIONS

• An article by Forbes advisor noted that while mortgage rates have improved in recent months, home affordability will likely remain a pressing challenge in 2024 as prices remain sticky and housing supply struggles to catch up to demand.
• Many would-be homebuyers were stuck on the sideline in 2023 as borrowing rates surged and existing owners in older, fixed, low-rate mortgages were less inclined to sell at lower prices.
• Experts expect conditions to improve in 2024, forecasting a busier spring home buying season this year compared to last. However, rates are unlikely to return to pre-pandemic levels, which is likely to keep the issue of existing owners “locked in” at lower rates a salient problem for the purchase market.
• According to Jiayi Xu, an economist at Realtor.com, roughly two-thirds of all outstanding residential mortgages have rates below 4%, making it challenging for the housing market to thaw significantly if rates remain north of this range.
• Nonetheless, experts expect that some reduction from today’s 6-7% range will induce higher transaction volume as demand rises, recharging upward pressure on home prices and incentivizing would-be sellers back into the market.

5. HOUSEHOLD DEBT

• According to the Federal Reserve Bank of New York, consumer debt in the US climbed precipitously during the fourth quarter of 2023, rising by $212 billion or 1.2$% from the previous quarter to $17.5 trillion—a new all-time high.
• Mortgage balances rose by $112 billion, followed by credit card balances (+50 billion) and auto loan balances ($12 billion).
• Other balances, including retail cards and other consumer loans, rose by a combined $25 billion, while student loan balances remained relatively unchanged.
• Delinquency rates were higher compared to the third quarter, climbing to 3.1% of all outstanding debt—an uptick of 10 basis points. However, delinquency rates remain below pre-pandemic levels, suggesting that inflation may be causing rising debt levels to appear more severe than reality.

6. JANUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 353,000 new jobs in January, while the unemployment rate was unchanged at 3.7%.
• Both metrics point to continued resilience in the labor market amid inflation pressures and interest rate increases, which may further complicate rate-cut considerations in the near term.
• Professional and business services led all sectors with 77,000 job adds, followed by healthcare (+70,000), retail trade (+45,000), and social assistance (+30,000).
• Declines were led by the mining, quarrying, and oil and gas extraction industry (-5,000), which, conversely, saw little net change during 2023.
• Employment changed little in major industries such as construction, wholesale trade, transportation and warehousing, financial activities, leisure and hospitality, and other services.

7. JOB OPENINGS AND LABOR TURNOVER

• According to the Bureau of Labor Statistics, the number of job openings in the United States changed little in December, charting at 9.0 million on the last business day of December.
• Total hires and separations were also little changed at 5.6 million and 5.4 million, respectively. Quits and layoffs saw little movement compared to the previous month, registering 3.4 million and 1.6 million, respectively.
• Job openings increased at a faster rate for establishments with 5,000 or more employees, while those with 1-9 employees and 10 to 49 employees saw little change.
• On a state level, job openings were up in 2 states (Illinois and Colorado) and down in 4 (Mississippi, Florida, Georgia, and Tennessee), while little changed across all other states and the District of Columbia.

8. LOGISTICS MANAGERS INDEX

• The US Logistics Managers Index increased in January to its highest level in three months and, for the first time since September, has seen each sub-metric of its index expand, according to the report.
• The expansion of the index was led by an increase in inventories, particularly activity by retailers who began to restock in January following the holiday season. Resultingly, inventory costs expanded considerably, while transportation costs rose for the first time since June 2022.
• Warehouse activity rose but at a slower pace, with expansion in both warehousing capacity and utilization.
• The report authors note that while January’s uptick is a strong signal, seasonality factors remain at play, requiring additional months of data before concluding that the logistics industry is returning to a period of growth.

9. CONSTRUCTION SPENDING

• According to the US Census Bureau, US construction spending climbed by 0.9% month-over-month in December, in line with November’s revised measurement and exceeding market estimates.
• Over the 12 months ending in December, total construction spending rose by 13.7%, while total construction value in 2023 was 7% above 2022 levels.
• Private construction spending grew by 0.7% in December, primarily driven by a 1.4% increase in residential sector spending, particularly single-family homes. Meanwhile, the non-residential declined by 0.2%. Public spending rose by 1.3% compared to November.

10. UNITED STATES ECONOMIC OPTIMISM INDEX

• According to the Real Clear Markets/TIPP Economic Optimism Index, sentiment fell in February compared to the previous month and registered below the consensus forecast.
• The index segments measuring respondents’ personal financial outlooks and confidence in Federal Economic Policies declined from January. Meanwhile, the index’s six-month economic outlook segment improved compared to last month.
• Investor optimism fell while it gained among non-investors, with investors experiencing a stronger directional movement in sentiment than non-investors.

 

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20240131a.htm
• (2) https://www.federalreserve.gov/data/sloos/sloos-202401.htm
• (3) https://www.mba.org/news-and-research/newsroom/news/2024/02/07/mortgage-applications-increase-in-latest-mba-weekly-survey
• (4)https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/
• (5) https://www.newyorkfed.org/microeconomics/hhdc
• (6) https://www.bls.gov/news.release/empsit.nr0.htm
• (7) https://www.bls.gov/news.release/jltst.nr0.htm
• (8) https://www.the-lmi.com/
• (9) https://www.census.gov/construction/c30/c30index.html
• (10) https://www.realclearmarkets.com/articles/2024/02/06/rcmtipp_economic_optimism_index_weakens_slightly_1009767.html

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. DECEMBER JOBS REPORT

• US nonfarm payrolls increased by 216,000 in December, above November’s growth of 173,000 jobs and exceeding the consensus estimate of 170,000 according to the Census Bureau’s latest employment report.
• Meanwhile, initial jobless claims fell during the final week of 2023, indicating that the US labor market remains tighter than some projected. Still, claims data in the upcoming weeks will help us understand how much of an impact holiday season hiring is having on current performance.
• Government jobs grew by 52,000 during the month, while the Leisure and hospitality sector continues to lead private employment growth, adding 59,000 jobs in December, followed by Education and Health Services (+42,000), and construction (+24,000)

2. FOMC MEETING MINUTES

• Minutes from the FOMC’s December meeting show that officials have reached consensus that rate-cuts are likely to come in 2024 but refrained from providing a more specific window for them to occur.
• Officials held the federal funds rate steady at 5.25 to 5.50% at their December policy meeting and indicated that they expect three 25 basis-point cuts by the end of 2024 in their most recent economic projections.
• While on average, FOMC members have a sense that the Fed’s tightening cycle has reached its peak, they continue to stress that their actual policy path forward will depend on how the economy continues to evolve.
• Officials noted an “unusually elevated degree of uncertainty” about the upcoming policy path, with some indicating that it may be necessary to keep the benchmark federal funds rate elevated if inflation doesn’t decelerate as expected, while others haft left the door open for additional hikes if conditions call for them.

3. HOMEBUYERS’ MONTHLY PAYMENTS DROP

• The median housing payment in the US is down by roughly $400 (-14%) from its October 2023 peak, enticing some would-be buyers back into the fray, according to a recent analysis by Redfin.
• The decline in payments coincides with a slow but steady drop in the weekly average mortgage rate, which propelled Redfin’s Demand Index up by 10% between November and December.
• New listings also finished 2023 up by 10% over the end of 2022. The report notes that as mortgage rates thaw, homebuying demand should rise as buyers take advantage of more choices alongside better financial conditions. Meanwhile, pending sales dropped by 3% annually to close 2023, its slowest decline in two years.

4. SFR INVESTMENT TRENDS

• According to latest data from Arbor Realty Trust/Chandan Economics, SFR/BTR construction starts reached a new record high in Q2 2023 as cap rates compress, accounting for 7.7% of all single-family starts.
• SFR cap rates fell to 6.1% during Q3 2023, the latest data available, as home prices climbed. Concurrently, SFR rents remained strong.
• SFR occupancy levels averaged 94.4% in Q3, dropping by 10 basis points from the previous quarter. Rent growth has continued to slow, dropping to 4.5% year-over-year through July, the latest data tracked in the report. It was the slowest annual rent growth tracked since April 2020, however, while rent growth has decelerated from its pandemic levels, it currently stands above its 2015-2019 average by a full percentage point.
• Investor purchases of single-family properties continued to decline in 2023, though at a slower pace than the year before, declining by -34.1% in Q2.

5. NON-RESIDENTIAL CONSTRUCTION MOMENTUM

• According to a recent analysis of Census Bureau data by the Associated Builders and Contractors (ABC), a national wave of non-residential construction spending should continue into 2024 despite a downtick in November.
• The analysis showed that non-residential construction spending fell by 0.1% in November due to a drop in public-sector activity, which dropped sharply during the month at a rate of -0.6% month-over-month. Meanwhile, private non-residential spending rose by 0.2% monthly.
• Spending is up by 18.1% over the past year, according to the ABC, while manufacturing-related construction spending continues to surge, according for roughly 45% of the increase in spending over the past 12 months.

6. INFLATION OUTLOOK

• Inflation is expected to continue to fall throughout 2024 driven by the unwinding of supply-chain driven price spikes and falling economic growth, according to a recent analysis by Morningstar.
• The report’s analysts forecast that durable goods will see the greatest drop in inflation or potential deflation as major supply constraints have faded and the global semiconductor market trends towards market surplus. Food and energy price pressures will also likely subside, as the market adjusts to the challenges brought on by the Russia-Ukraine War. Housing price pressures should also reduce as new supply comes online.
• The PCE price index has fallen from a peak of 7% annually in June of 2022 to 2.6% year-over-year through November 2023. Core PCE inflation, the FOMC’s preferred measure, has similarly declined but less steeply.
• The analysts expect average US prices to climb by 1.8% per year between 2024 and 2027, below the Fed’s 2.0% PCE target rate. However, if price pressures continue to exceed 2.0% as the Fed’s tightening cycle unwinds, officials may be ready to induce a recession in 2024 to achieve its goals.

7. CMBS DELINQUENCIES

• CMBS delinquencies fell seven basis points in December, according to recent data by Trepp. Moreover, December’s CMBS activity reverses several months of rising Office delinquencies, with the sector’s rate declining by 26 basis points to 5.82%.
• Annually, the overall CMBS delinquency rate up 147 basis points from the end of 2022 to 4.51% in December 2023, led by the Retail sector with a 6.47% rate. The delinquency rate for Office is a close second at 5.82%.
• Industrial and Lodging were the only sectors tracked that saw a monthly in delinquencies during December, each climbing by 19 bps to 0.57% and 5.40%, respectively. Nonetheless, Industrial delinquencies are negligible compared to the overall market.

8. RETAIL INVENTORIES

• Retail inventories, excluding autos, dropped by 0.8% month-over-month in November, its third consecutive monthly decline, in part reflecting the seasonality factor of relatively high sales activity during the holidays.
• Monthly inventory growth during 2023 reached a high of 3.8% month-over-month during February and as low as -1.1% month-over-month in October. The historical monthly average for retail inventory growth, which has been tracked since 1992, is 0.3%.
• Including autos, annual retail growth charted in at 5.1% during November, reflecting the outsized impact that vehicle sales have on retail inventories. Nonetheless, retail inventories including autos also ticked down on a month-over-month basis, falling -0.1% month-over-month.

9. WHOLESALE INVENTORIES

• US wholesale inventories fell by 0.2% month-over-month through November, its second straight monthly decline, according to Census Bureau data. Besides a flat reading in February and a slight uptick in September, monthly wholesale inventories fell consistently throughout 2023.
• Inventory declines follow a dop in non-durable goods, which dropped -9.6% in November following a 0.9% in October. Meanwhile, inventories of durable goods rose in November by 1.2% following a flat October.
• Inventories fell 3.1% year-over-year through November, with December’s holiday activity likely adding downward pressure to wholesale levels.

10. REDBOOK INDEX

• The Redbook Index, a weekly sales-weighted index of year-over-year same-store sales growth of large US retailers, finished 2023 with a 5.6% increase over the same week in 2022, according to Redbook Research, Inc.
• Between 2005, when the index was created, and the end of 2023, the US Redbook Index has averaged 3.58%. The index’s all-time low was -12.6% reached during the initial pandemic shutdown in May 2020, while its all-time high of 21.9% was reached in November 2021.
• After reaching its November 2021 peak, the US Redbook spent all of 2022 in decline before rebounding in 2023. Index growth is unlikely to return to record growth seen during the pandemic’s economic rebound, but merchandise sales have maintained a healthy level in the face of increased economic uncertainty over the past year

 

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/empsit.nr0.htm
• (2) https://www.federalreserve.gov/monetarypolicy/fomcminutes20231213.htm\
• (3) https://www.redfin.com/news/housing-market-update-monthly-payments-drop/
• (4) https://arbor.com/research/reports/single-family-rental-investment-trends-report-q4-2023/?utm_content=2023_q4&utm_medium=blog&utm_source=chatter&utm_campaign=chandan_sfr_quarterly_report&utm_term=NA&UTMsource=chatter&rdnaLabel=chandan_sfr_quarterly_report
• (5) https://www.globest.com/2024/01/04/nonresidential-construction-momentum-expected-to-continue/
• (6) https://www.morningstar.com/economy/why-we-expect-inflation-fall-2024
• (7) https://www.trepp.com/trepptalk/cmbs-delinquency-rate-falls-slightly-december-2023-office-rate-posts-rare-dip
• (8) https://www.census.gov/economic-indicators/#adv_mrts
• (9) https://www.census.gov/economic-indicators/#adv_mrts
• (10) https://www.redbookresearch.com/8702.html