SVN | Research Economic Update 9.12.2024

1. CPI INFLATION

According to the US Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) increased 0.2% month-over-month (MoM) in August, repeating July’s pace and in line with the consensus forecasts that led up to the data release.
The annual CPI measure fell for the fifth consecutive month to 2.5%, its lowest since February 2021.
Over the past 12 months, energy prices have been the main force driving down the headline inflation rate, which is down by 4% year-over-year (YoY). Transportation prices have also kept the inflation rate elevated, up 7.9% annually, yet they have decelerated from the previous month.
Core-CPI inflation, which excludes the more volatile food and energy components from the index, rose by 0.3% MoM in August, marginally above July’s 0.2% pace.
Monthly, core inflation was higher than expected, boosted by an acceleration in shelter and airfare price increases. Annually, core price inflation matched its three-year low of 3.2% reached in July.
Shelter remains the critical component of CPI, which is still elevated on an annual basis and continues to accelerate — up 5.2% YoY and up ten basis points from July. Airfare price acceleration can be attributed to more robust travel demand during the summer, which should ease in the coming months.
While the PCE price index is the Federal Reserve’s preferred measure of inflation for influencing monetary policy decisions, August’s CPI report is more evidence that inflation is trending downward and likely cements the outlook for a September rate cut.

2. CRE POISED FOR CUTS

According to Lightbox’s monthly CRE Activity Index, CRE transaction activity has inched up every month since March, and the sector appears poised for a strong Q4, with the market anticipating one or more rate cuts by the end of 2024.
The index softened slightly in August, interrupting a five-month trend of modest increases. However, the analysts of the report did not consider the downtick a concern, with the August level still nine points above its level one year ago.
The year-over-year climb in activity reflects a CRE transaction landscape that is gradually thawing from a pricing standoff between buyers and sellers. As rate cuts filter into commercial mortgage borrowing rates, investors are likely to deploy more capital if current patterns hold, causing transaction activity to rise.
Still, investors will need to keep watch of a softening labor market and its potential implications on consumer spending and demand. It remains to be seen whether the Fed is ahead of or behind the curve on a rate pivot and can stave off an economic recession.

3. MULTIFAMILY AWAITS IMPACT OF SEPTEMBER RATE CUT

Multifamily rent growth was flat in August as shifting seasonality trends ended a six-month streak of growth, according to the latest Multifamily National Report by Yardi Matrix.
According to the report, the apartment sector is in a holding pattern as the market awaits an imminent September rate cut. Following the Fed’s anticipated move, a thawing of transaction and refinancing activity is expected to follow. An interest rate cut is also likely to reduce the pressure on underwater properties.
Still, as rates are poised to come down, the economy is showing signs of cooling, with slowing job growth and weaker wage growth compared to recent years. As the Multifamily market feels rate relief, a slowing labor market may place a drag on consumer and apartment demand.

4. ELECTION VOLATILITY

According to a recent analysis by Chandan Economics, market volatility typically spikes in the months leading up to a US presidential election, usually beginning to shift around July.
On average, during calendar years when there is a presidential contest, volatility, as measured by the CBOE Global Market’s Volatility Index (VIX), has tended to decline over the first seven months of the year before shifting higher during the final three months of the campaign.
In September and October of election years, the VIX has had an average value of 19.2 compared to an average of 18.2 during July.
The volatility experienced in stock markets over the past several weeks may, in part, reflect the typical election impact on markets and a market tendency that is in part independent of recent economic developments.

5. AUGUST JOBS REPORT

According to the BLS, the US economy added 142,000 jobs in August, above July’s downwardly revised increase of 89,000 but indicative of additional labor market cooling, with another downward revision in August likely.
The unemployment rate fell slightly to 4.2% last month, which put an end to a months-long increase in the unemployment rate that began in March.
Education, healthcare, leisure & hospitality, and government positions accounted for 117,000 of the 142,000 jobs added in August. However, new healthcare and government jobs have slowed notably. Professional & business services and information-related jobs remain subdued.
The number of people employed part time for economic reasons was little changed at 4.8 million, but the measure is still up from 4.2 million one year ago.
Average hourly earnings increased by 14 cents, or 0.4%, in August and are up 3.8% over the past year. Annual wage growth has gradually slowed from a post-2020 peak of 5.9% in March of 2022.

6. BEIGE BOOK

According to the Federal Reserve’s latest beige book of economic activity, nine (9) of the 12 Federal Reserve districts reported slow or declining activity, up from five (5) in the previous period.
Employment levels were steady across most districts, but there were notable reports of firms lowering overall employment through reducing hours, attrition, or only filing necessary positions.
Consumer spending fell after remaining steady throughout the previous period. Meanwhile, manufacturing activity declined in most districts.
On average, most districts reported mixed residential construction and softer home sales, while commercial construction and real estate activity were mixed.

7. RETAIL DURING THE POST-PANDEMIC PERIOD

As detailed in a recent analysis by Brookings on commercial real estate trends during the post-pandemic period, Retail was the most stable sector throughout the pandemic, balancing steady value growth with stable occupancy levels.
Despite a sharp rise in sector distress during the early days of the pandemic lockdown, retail demand has grown from its pre-pandemic levels, and rental properties have generated competitive returns.
Nationally, the Retail vacancy rate is at a five-year low and is the only product type for which aggregate vacancy has declined since 2019.
Still, these vacancy rates vary locally, and the variation often reflects increasing vacancies in downtown areas and retail inequality in minority-majority neighborhoods.

8. TRANSIT-ORIENTED DEVELOPMENT STUDY

A recent GlobeSt look into a study conducted by the University of North Texas Economic Research Group describes the impact of transit-oriented development on local economic activity in Dallas.
The study examined the impact of real estate developments near Dallas Area Rapid Transit (DART) light rail stations and found an increase in direction spending and job creation in those areas.
Focusing on 21 real estate developments built near DART stations between 2019 and 2021, the study found that collectively, the projects generated $980 million in direct spending and 10,747 jobs.
The projects encompassed a mix of commercial, residential, and public developments. They generated $144.7 million in federal tax revenue and another $49.6 in state and local tax receipts, according to the results of the analysis.

9. LOGISTICS MANAGERS INDEX

The US Logistics Managers Index ticked down slightly in August compared to July, but the report continued to point to a moderate pace of growth in the logistics sector.
Most notably, there was an increase in inventories as firms gear up for the holidays and Q4 spending season. August ended three consecutive months of contractions in inventory levels. The report also suggests that firms may be anticipating a return to the traditional patterns of seasonality not experienced since before the pandemic.
The effect of increased warehousing capacity and transportation capacity partly softened the rise in inventories.
According to the analysis, this is consistent with reports that firms are keeping most of their inventory near points of entry, waiting for them to move to retailers. Transportation prices eased compared to the previous month, while warehousing prices were up.

10. NFIB SMALL BUSINESS OPTIMISM INDEX

According to the National Association of Independent Business, small business optimism in the US declined in August to its lowest level in three months.
Inflation remains at the top of owners’ minds, and sales expectations have fallen significantly. Overall, rising uncertainty continues dominating movements in the index, with the outlook on future business conditions gradually worsening.
24% of small business owners cited inflation as their number one concern, while the net percent of owners expecting higher sales volumes fell to a net -18%. Meanwhile, 20% plan to raise compensation in the next three months, an uptick from the latest report.

SUMMARY OF SOURCES

1. INFLATION

According to the BLS, the US Consumer Price Index (CPI) reaccelerated on a monthly basis in July but continued to decelerate annually. Prices rose by 0.2% between June and July, following a decline of 0.1% the previous month. Prices decelerated to 2.9% year-over-year before seasonal adjustment.
The monthly uptick in Core-CPI, which excludes volatile food and energy prices, mirrored that of headline CPI, with core prices up 0.2% in July compared to 0.1% the previous month. Core prices climbed 3.2% year-over-year— ten (10) basis points below the June pace.
The uptick will unlikely throw the Fed off an anticipated rate cut at their upcoming September meeting. Recent cooling in the labor market, alongside the downward trend of inflation this year, will encourage the Fed to refocus its efforts to fulfill its dual mandate toward maximum employment compared to price stability. As of Wednesday, August 14th, futures markets price in a 100% chance of a rate cut in September.

2. EMERGENCY RATE CUT, INTEREST RATE PROJECTIONS

Rate cut, FOMC, GDP, CPI

As panic settled into markets earlier this month when emerging economic data pointed to a rising chance of a US recession, some experts and observers floated the idea that the FOMC could produce an emergency inter-meeting rate cut to shore up market certainty.
The potential for the move, which is uncommon and is primarily deployed in response to sudden shocks in the economy, has largely evaporated in recent days as the futures market grounds itself in the likely reality that policymakers will stick with a previously anticipated September timeline for an initial rate cut.
The CME Group’s FedWatch tool, which tracks market-based interest rate forecasts, has experienced notable fluctuations in the past week as markets digest the flurry of data and developments hitting the news cycle in early August.
Markets priced in an 85% probability of a 50-basis point cut at the September meeting by Monday, August 5th, its most dovish signal yet, but it receded to a 47.5% probability by Monday, August 12th. Meanwhile, expectations of a 25 basis-point cut—which had dominated forecasts coming into the month—fell as low as 15% one week ago before climbing back to 52.5% as of August 12th.
This volatility shows how uncertainty has dominated the economic outlook in the past couple of weeks. Still, the falling likelihood of an inter-meeting cut and the coalescing of expectations around a 25-basis point cut in September appear to show that the fog has begun to clear.

3. JULY JOBS REPORT

According to the Bureau of Labor Statistics (BLS), US job growth slowed to 114,000 added payrolls in July, well below estimates. Meanwhile, the unemployment rate edged up to 4.3% — its highest level since October 2021.
On the one hand, some cooling in the labor market affirmed the market’s expectation of an anticipated September rate cut by Fed policymakers. Still, these data, combined with falling corporate earnings and a sharp uptick in initial unemployment claims during the final week of July, sent a chill throughout markets, fearing that the Fed has waited too long to pivot.
Notably, July’s jobs report triggered the Sahm Rule, which is considered in play when the three-month unemployment rate average reaches 0.5% or more than its 12-month low and signals that the economy is in recession.
However, several observers of the Sahm Rule, including the namesake economist Dr. Claudia Sahm, caution that like other recession indicators that have seemingly been triggered in the past couple of years, the Sahm Rule’s emergence may be a false signal that is more indicative of the unusual disruptions in the post-pandemic economy.
Digging deeper, the number of Americans working part-time for economic reasons rose to its highest level since June 2021, while those reporting being out of work for 27 weeks or more rose to its highest level in 2022.

4. INITIAL CLAIMS

After reaching their highest level in a year (250k) during the previous week, initial unemployment claims fell by 17k to 230k during the week ending on August 3rd, based on the latest data from the US Department of Labor.
While the release should calm fears of inevitable labor market deterioration, the latest count remains above the year-to-date average and confirms emerging weakness in the job market.
The four-week moving average for initial claims also climbed to its highest level in a year, while continuing unemployment claims increased to its highest level since November 2021.

5. RECESSION CHANCES

Some Wall Street analysts, including Goldman Sachs, have recently increased the probability of a US recession in 2025 in light of recent signs of a labor market and corporate earnings slowdown. However, most continue to stress that while the odds have increased, it remains the more unlikely scenario.
Shortly before the July Jobs report was released, Goldman Sachs raised its odds for a recession in 2025 from 15% to 25%, notably in anticipation of a not-so-bad July Jobs report. Goldman analysts have noted that risks remain limited partly because economic data has moderated but not spiraled out of control, and Fed policymakers appear poised to adjust their sails accordingly.
Conversely, UBS, who released their forecast following the employment update, cut their odds of a US recession, albeit from a significantly higher probability of 60% down to 53%.
UBS’ forecast diverges from those of other investment bank heavyweights, with Goldman Sachs and JP Morgan trending in the opposite direction.
The origin of the divergence is likely related to the focal points of each bank’s modeling. Goldman and JP Morgan’s models have digested recent data as signs of deterioration that raise the chance of a recession. Meanwhile, the UBS model likely weighs this deterioration as an increasing likelihood that the Fed’s rate cut schedule will speed up, increasing the chance that we will avoid recession.

6. MORTGAGE REFINANCING CLIMBS

Mortgage Refinanace Loan, Loan, CRE

Adding to the inflection point characterization of recent economic data trends, mortgage refinancing activity surged by 35% in the past week as average mortgage rates fell to their lowest levels in close to 2 years by some measures.
According to Fannie Mae, the average contract interest rate on a typical 30-year fixed-rate mortgage fell from 6.72% to 6.47% during the week ending August 7th, its lowest level since September 2022.
The Mortgage Bankers Association reports that the refinance share of mortgage activity increased from 41.7% to 48.6% of applications across a similar period. As interest rates have tightened over the past few years, new mortgage applications took up an increasing share of overall mortgage activity as refinances fell steeply. The recent uptick in the refinancing share of mortgage activity points to some thawing in the housing market as markets eye a monetary policy pivot.

7. LOGISTICS ACTIVITY AND INDUSTRIAL DEVELOPMENT

The US logistics sector rose to its highest activity level in four months in June, according to the latest data from the Logistics Managers’ Index. Transportation prices rose to their highest since May 2022, while transportation capacity also expanded.
Both warehousing utilization and prices rose in June from the previous month, while inventory levels contracted for a third consecutive month as retailers moderated stock levels. Conversely, manufacturers, wholesalers, and distributors have built up their inventories in recent months out of anticipation of an uptick in demand as the holiday season approaches.
Industrial vacancies have been on the rise for six straight quarters, a cyclical consequence of the large volumes of new supply that have come online to meet the burgeoning demand of the past decade. However, the recent positive trend in the logistics sector may signal a turning point.
Still, uncertainties lie ahead. GlobeSt reports in a recent article that several manufacturing projects envisioned under the Inflation Reduction and CHIPS and Science Acts have stalled and have created a cloud of uncertainty around sector demand.
How consumer dynamics evolve in the coming months and whether interest rate policy shifts toward a more accommodative financing environment will have important implications for the Industrial sectors’ medium-term outlook.

8. NET LEASE VOLUME FALLS

According to a recent report by Newmark, net lease transactions plummeted in Q2 2024, down 14.71% from the same period last year.
Utilizing data from Real Capital Analytics, the report notes that the dollar volume of net lease transactions dropped from $10.71 in Q2 2023 to $8.93 billion in Q2 2024.
Ignoring dollar volume and focusing solely on transaction volume, activity is down a much less pronounced 6.49%, suggesting that deal prices are falling faster than overall deal volume.
Revisiting dollar volume but on a property type level, Office transaction value is down 20.47%, Retail is down 18.22%, and Industrial is down 10.74%. However, while Office has seen the steepest fall, it transacted $2.02 billion in Net Lease deals in the second quarter, while Retail charted the lowest with just $1.84 billion in deals.

9. HOMEOWNERSHIP CLIMBS FOR LOW-INCOME HOUSEHOLDS

A recent analysis by the Federal Reserve of Minneapolis shows that despite high mortgage rates and record house prices, US homeownership is rising, particularly among America’s lowest-income households.
According to the analysis, in 2023, 47.1% of households in the bottom 1/5th of the income distribution were homeowners, approaching the all-time high of 47.7% reached in 2005.
Homeownership rates among the lower-income cohort fell relatively consistently from 2005 to 2015, but they rose by six percentage points between 2015 and 2023, which analysts point out mirrors a similar expansion that occurred between the mid-1990s and mid-2000s.
Age is a key factor in the trend. Between 2015 and 2023, the average age of a head of household in a lower-income home, regardless of ownership, increased by three years. In other words, the trend may be more indicative of an aging US population staying in their homes for longer rather than younger Americans increasingly owning homes.

10. GLOBAL REIT RETURNS

According to Nareit’s Mid-Year report released in July, global REIT returns were down 3.8% year-to-date through June 30th — an improvement from the -9.4% pace that emerged through the middle of April.
Healthcare, residential, and data center-focused REITs have outperformed the rest in 2024 and may reflect where investors see the most significant upside as CRE looks to turn the page from today’s high-rate environment. Healthcare REIT returns are up 8.6% year to date, residential REITs are up 3.7%, and data centers REITS are up 1.8%.
Other key sectors, timberland, telecom, and industrial, which collectively account for about 38% of Nareit’s index, have declined by 16.3%, 11.9%, and 11.7%, respectively.
Zeroing in on North America, REITs on this continent outpace average global performance even as returns are down by 1.1% year-to-date.

SUMMARY OF SOURCES

1. CPI INFLATION

commercial real estate, consumer price index

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

Farm workers in Camarillo, southern California, this week. Photograph: Étienne Laurent/AFP/Getty Images

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. INTEREST RATES

commercial real estate

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

commercial real estate, real estate

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

Commericial real estate, industrial real estate, multifamily real estate, office real estate, retail real estate

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. 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

commercial real estate

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

commercial real estate

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

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/