NATIONAL OVERVIEW

INDUSTRIAL

“All good things must come to an end,” said nobody in the Industrial sector in 2021. As the US economy continues to modernize and consumer behavior evolves, the Industrial sector has stood as a winner at every step along the way. Heading into 2021, the National Association for Industrial and Office Parks (NAIOP) forecasted that net absorption on the Industrial sector would total 329.5 million square feet for the calendar year — a figure that would have represented a 28% increase over the previous record high. When all was said and done, the Industrial sector posted net absorption totals of 432.5 million square feet, blowing past the previous record by more than 68%.¹ With an eye on the horizon, NAIOP anticipates that fervent demand will continue to outpace new supply leading, with net absorption forecast at a robust 401.4 million square feet.
Even as COVID restrictions became less widespread in 2021 and consumers returned to shopping aisles, in absolute terms, last year was the most active for e-commerce consumption on record. In 2020, e-commerce retail sales jumped by 32%, landing at $759.6 billion.² In 2021, e-commerce retail sales grew by 14.6%, coming in at $870.7. Moreover, 2021’s e-commerce sales growth rate of 14.6% is well in line with the pre-pandemic pattern.³ In the five years leading up to 2020, e-retailing grew by an average of 14.2% per year, while never growing slower than 13.4% or faster than 15.4%.⁴

Hefty demand growth coming from the steady surge of e-retailing has sent prices in the sector soaring. Noted by SVN® Industrial Product Chair Curt Arthur, SIOR, “the price index for industrial properties rose a record 28.1% from a year ago, the fastest annual rate among the major property sectors, according to Real Capital Analytics.” Further, transaction activity reached a fever pace towards the end of last year, as December alone “was the most active month in US history with one-month sales exceeding annual totals from 2008-2011.”

Pushing our e-shopping carts to the side, it isn’t just e-retailing distribution facilities that are responsible for Industrial’s record year — manufacturing also had a significant role to play. The Board of Governor’s Industrial Production Index for Manufacturing, which measures the inflation-adjusted output of manufacturing activities, saw a steep drop-off during the pandemic lockdowns, with production declining by nearly 16% month-over-month in April 2020. Now, as of January 2022, manufacturing production has made up all its lost ground, and output currently stands at its highest level since Fall 2018.⁵

 

Financial Performance

TRANSACTION VOLUME

The Industrial sector maintained its solid momentum in 2021, posting the most transaction volume of any commercial property type other than Multifamily. For the calendar year, according to Real Capital Analytics, $173.6 billion of Industrial assets changed hands in 2021. Compared to 2020 levels, last year’s transaction volume totals rose by about 63% — the second-lowest mark across the core-four commercial property types.⁶ However, the only reason why Industrial’s 2021 transaction growth rate stands below Retail and Multifamily is because of its strong 2020, despite macroeconomic headwinds. In 2020, sans Industrial, all CRE property types saw declining transaction volumes between 24% and 38%.⁷ Meanwhile, Industrial only took a slight step back, declining by just over 9% in 2020.⁸ Compared to 2019’s previous peak, 2021’s transaction volume totals are up by an impressive 48%.⁹

CAP RATES AND PRICING

If Sir Isaac Newtown had been invested in the Industrial sector, perhaps the phrase would have been “what goes up must go down, and for Industrial cap rates, what’s already down can just keep on going.” Measured year-over-year, Industrial cap rates have fallen every quarter since Q3 2010.¹⁰ Through Q4 2021, Industrial cap rates are down to a lowly 5.4% — a decline of 32 bps from one year ago.¹¹ Across the different industrial sector sub-types, Warehouse assets saw the most significant cap rate compression in 2021, declining by a weighty 42 bps, bringing cap rates down to 5.3%.¹² Single Tenant Industrial space also saw steady cap rates declines, with yielding falling 31 bps year-over-year to average 5.5% in Q4 2021.¹³ Despite the rebound in manufacturing activity measured in 2021, cap rates for Flex Industrial space ticked up marginally last year, rising by 8 bps to land at 6.1% through Q4 2021.¹⁴

With cap rates declining to new all-time lows in 2021, significant pricing pressure was felt throughout the industrial sector. Measured year-over-year on a price per square foot basis, valuations ended 2021 30.8% higher than they were one year ago — the highest mark of all commercial real estate property types.

 

Markets Making Headlines

1-HOUR DELIVERY LOCATION, LOCATION, LOCATIONS

Across most commercial real estate verticals, Gateway markets have lagged the rest of the pack during the pandemic. Still, major metros have not lost their shine when it comes to Industrial CRE performance. Even as residents have left costly coastal metros like New York and Los Angeles on the margins, these markets remain behemoths of population agglomeration. As of the 2020 Census, there were more than 20 million people living in the New York MSA and more than 13 million living in the Los Angeles MSA. No other metro area is above 10-million residents.

With respect to Industrial space demand in major markets, in short, the conversion from physical retail to e-retail has far outweighed any marginal population losses. In Northern New Jersey, an area that sits with the Greater New York Metropolitan Area, Industrial rents per square foot surged by 14.1% last year, according to CoStar — the second-best reading in the country. From a valuation perspective, the North New Jersey area saw the third-highest levels of asset appreciation last year, growing 19.8%.¹⁵

Moving over to the West Coast, the Inland Empire — an expansive semi-urban area directly adjacent to Los Angeles— saw the second-highest levels of Industrial asset appreciation last year, with prices growing by 20.8% year-over-year.¹⁶ Moreover, the Inland Empire finished 2021 with the seventh-highest occupancy rate (96.4%) of all tracked markets.¹⁷ Ventura and Los Angeles follow as the eighth and ninth-highest Industrial occupancy rates in the country, reflecting overall strength throughout the Greater Los Angeles area. According to David Rich of SVN | Rich Investment Real Estate Partners, “Industrial remains the healthiest commercial real estate sector in Los Angeles – outperforming even multifamily in terms of price and rent appreciation.” Mr. Rich goes on to note that in Los Angeles, “demand is expected to continue into [mid-2022], due in large part to accelerated online consumer consumption from the COVID economy.”

In NAIOP’s Q1 2022 Forecast Report, the researchers note that concerns over future space needs in the future are spurring competition for available space today. In dense markets such as the metropolitan areas surrounding New York and Los Angeles, where space is limited, the effect is bottlenecking of prices. These observations are shared by Mr. Rich, who remarks that “area growth restrictions and increased developments costs [in Los Angeles] will contribute to strong property values and rental rates beyond 2022.”

THE WESTERN EDGE OF EASTERN TIME

Head west a few hundred miles from the eastern seaboard, and you’ll run into an inter-region set of markets that all straddle similar longitudes. Markets such as Atlanta, Knoxville, and Columbus may not share much in common other than their time zones, but they all stood out as top performers in the Industrial sector last year.

Columbus, OH, was one of the most consistent booming Industrial markets in 2021, posting the tenth highest increase in market rents (+11.8%) and the tenth highest increase in Industrial occupancy rates (+2.7 percentage points).¹⁸ Doug Wilson of SVN | Wilson Commercial Group, LLC notes that “the definition of “’ Industrial real estate”’ is evolving rapidly in Columbus. There are few industrial operations any more here, but there are many distribution centers. And those are complemented by the prevalence of massive fulfillment centers. And add to that, large data centers to round out the new wave of industrial “sized” properties populating this market. The construction pipeline of speculative industrial buildings is surging to about 13–15 million SF, while vacancy is a mere 2%-3%.”

Atlanta posted significant Industrial sector rent increases in 2021, coming in at the fifth-highest annual increase in the country.¹⁹ Closing out last year, according to CoStar, Industrial space in Atlanta was renting for an average of $7.26 per square foot— an increase of 12.7% year-over-year.²⁰ No market had a higher occupancy rate than Knoxville, TN, in Q4 2021, coming in at a stellar 99.0%.21

 

Macro Economy

ECONOMIC GROWTH

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

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

 

INFLATION & MONETARY POLICY

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

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

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

THE GREY AREAS

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

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

 

NATIONAL OVERVIEW SOURCES

1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau

5. Board of Governors of the Federal Reserve

6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021

12. Real Capital Analytics; Through Q4 2021
13. Real Capital Analytics; Through Q4 2021
14. Real Capital Analytics; Through Q4 2021

15. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
16. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
17. CoStar; Through Q4 2021. Note: Measured across the top-100 markets

18. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
19. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
20. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
21. CoStar; Through Q4 2021. Note: Measured across the top-100 markets

MACRO ECONOMY SECTION SOURCES

1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau

6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021

1. THE FED RAISES INTEREST RATES

• For the first time since 2018, The Federal Reserve’s policy-setting committee raised interest rates as they pivot away from recovery-focused accommodations towards a more aggressive fight against persistent domestic inflation.
• The Federal Funds rate was raised by 25 basis points, moving from the 0-0.25% range that it has been at since March 2020 to a target range of 0.25%-0.50%. Leveraging results tabulated from the recent Summary of Economic Projections released on March 16th, FOMC members, on average, project six more rate hikes in 2022 in an effort to curb inflationary pressures not seen in more than 40 years.
• Throughout the pandemic-recovery, The Fed consistently signaled its commitment to an accommodative policy regime as the US economy dealt with the macroeconomic scars of COVID-19 case surges and related restrictions on activity. As GDP recovered and labor market distress continued to subside in 2021, policymakers began pivoting their focus to tempering high inflation as stronger consumer demand bucked up against supply constraints.
• The challenge for the Fed now will be to moderately slow the economy enough to relieve inflationary pressures without kicking the US economy into recession. The FOMC’s decision to raise rates despite increased economic and geopolitical uncertainty stemming from the War in Ukraine may be a signal that they are willing to accept a degree of economic pain in order to reduce inflation.

2. POTENTIAL SANCTIONS’ IMPACT ON CRE

• Where there are few direct links between the economic sanctions recently levied against Russian companies and the success of US Commercial Real Estate, there are a few noteworthy changes that may make it more crucial for companies and managers to increase their due diligence.
• As part of the recent sanctions package, the US Treasury added additional names of people and companies to add to their Office of Foreign Asset Control (OFAC) list. It is already commonplace in commercial real estate transactions for contracts to include language that ensures that an investor is not part of the OFAC list, but as usage and enforcement of the sanctions tools push through the economy, individuals and companies involved in real estate transactions will need to be as careful as ever to avoid potential fines and administrative penalties.
• Large brokerages who conduct business in Russia have already started to suspend operations in leasing, investment, and property management services, with some extending their suspensions to Belarus. For brokerages with less international exposure, the impact will be slim to none. However, some risk has arisen domestically. Anecdotal references to wealthy Russian real estate clients canceling upcoming deals or altering plans out of fear of asset seizure have popped up in recent weeks, but there is scant data available on where or how much this exposure has materialized.

3. SHORT TERM ENERGY OUTLOOK

• Forecasts for the short-term energy outlook compiled by the US Energy Information Administration (EIA) highlight increased uncertainty in global energy markets stemming from Russia’s invasion of Ukraine, among other factors.
• According to the EIA, Brent crude oil spot prices averaged $97 per barrel in February, an $11 per barrel increase from January. During the first week of March, as tensions in Ukraine increased and western sanctions began to take hold, daily spot prices for Brent crude closed close at $124 per barrel.
• Adding to price pressures is the cyclical low that oil production has experienced over the past several quarters. According to the EIA, global oil inventories have fallen steadily since Q3 2021 and are estimated to have fallen further during the first two months of 2022. Production decisions by OPEC+ and US natural gas producers in the coming weeks will provide a more accurate short-term outlook for oil prices. Initial signals by OPEC+ members have suggested an unwillingness to increase production in order to alleviate prices, though one member nation, The United Arab Emirates (UAE), has been more ambiguous on their commitments.

4. CONSUMER PRICE INDEX

• Consumer prices rose 7.9% year-over-year through February, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). Year-over-year price increases have now accelerated for six consecutive
  months and have remained elevated above the Federal Reserve’s 2% inflation rate target since March 2021. (Note: the Fed explicitly uses the PCE Deflator as its preferred gauge of inflation but still considers CPI a key indicator of macroeconomic inflation).
• Prices climbed by 0.8% month-over-month on a seasonally adjusted basis, rising above January’s increase of 0.6%. Gasoline, food, and shelter were the largest contributors to February’s uptick, rising respectively by 6.6%, 1.0%, and 0.5% on a month-over-month basis.
• After weighting for relative importance, Gasoline prices accounted for roughly one-third of all inflation in February. Overall gasoline prices have climbed by 38.0% in the past 12-months, while fuel oil prices specifically have risen further, climbing by 43.6% in the past 12-months.
• Core-CPI, which removes food and energy prices that tend to be more volatile and less responsive to monetary policy decisions, increased by 0.5% month-over-month and 6.4% year-over-year. The increase in shelter costs accounted for just over 40% of all inflation in non-food or energy goods and services.

5. JOB OPENINGS AND LABOR TURNOVER SURVEY

• The number of job openings in the US was little changed in January from the previous month, standing at 11.3 million on the last business day of January, according to the Bureau of Labor Statistics.
• Hires and separations were also little changed at 6.5 million and 6.1 million, respectively. The quits rate fell to 2.8%, while layoffs and discharges were little changed at 0.9%.
• The fall in quits was most apparent in retail trade jobs, which saw 69k fewer people quit in January than in December. Finance and Insurance related roles saw the highest number of quits in January, reaching 30k.
• In the past 12-months, 76.4 million people in the US have started new jobs, while 70.0 million have separated from their previous job, charting a net employment gain of 6.4 million since January 2021.

6. NEW BUSINESS APPLICATIONS

• New business applications fell by 2.1% in February from January, according to the latest release of the Census Bureau’s experimental Business Formation Statistics.
• Roughly 420k new businesses were created last month, derived from applications for new Employer Identification Numbers (EIN) filed with the IRS. 135k of these businesses are considered “high propensity,” a drop of 3.0% from January. Newly formed businesses with planned wages dropped by 1.6% to 48k while new corporations dropped by 4.9% to 49k.
• Agriculture led all industries in newly formed business in February, adding 3,473 businesses, while Utilities had the highest percent increase at 14.6%. Retail trade slowed the most, producing 6.6% fewer new businesses in February than January.

7. RETURN TO OFFICE IN GATEWAY MARKETS

• Data produced by keycard operator Kastle systems shows that in March, office occupancy returned to pre-Omicron levels.
• Since March 2020, activity at office buildings has sat in a pandemic-era lull. However, activity had started to improve as the Delta subsided in the Fall of 2021. Pandemic-era office occupancy peaked on December 1st, 2021, with a 40.6% physical occupancy rate before plummeting again as Omicron cases began to surge across the US. In Kastle’s most recent weekly survey on March 9th, office occupancy climbed back to 40.5%
• The Kastle survey relies on data from office access systems in place across 10 US Cities. As of March 9th, Austin led all cities with a 58.3% occupancy rate, followed by Houston at 52.4% and Dallas at 50.7%. San Francisco remained the lowest in the US, with an office occupancy rate of just 29.4%.

8. ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG)

• A survey by Deloitte of 300 senior finance, legal, and sustainability leaders found an increase in the preparation and adoption of reliable data by companies for ESG reporting. This comes amid growing ambitions by the business landscape to address environmental and social concerns while attempting to accurately account for the risks and potential value creation opportunities presented by ESG.
• 57% of survey respondents say that data availability and quality are the biggest challenges to ESG, which may explain the disconnect between firms and managers with ESG ambitions those with the structures in place to work towards them. 57% of respondents indicate that they are working to implement ESG working groups within their firms, but just 21% of respondents say that they currently have an ESG working group dedicated to implementing ESG strategies.
• Roughly 8-in-10 respondents believe that they will need additional resources to generate ESG disclosures, while 9-in-10 respondents specifically listed technology as the primary need to help enable complete and accurate ESG disclosures.

9. THE GREAT RESIGNATION

• A new Pew Research poll on March 9th shows that a majority of workers who quit their job in 2021 cited low pay, no opportunities for advancement, or a lack of feeling respected as the reasons for departing.
• A net 63% indicated both low pay and lack of advancement opportunities as one of the main reasons for leaving, while 57% indicated feeling disrespected at work. Despite the attention that relocation efforts have been given in the search for answers to the sky-high quits rates seen in 2021, only 35% of respondents indicated that wanting to relocate accounted to a different area was a reason for leaving.
• Roughly half of the respondents cited child care burdens as a reason for quitting, with a similar share pointing to a lack of flexibility in their work hours.
• In a separate question that asked specifically whether the COVID-19 outbreak contributed to their decision to quit, 31% indicated that they were.

10. LEADING INDICATOR OF REMODELING ACTIVITY (LIRA)

• The Leading Indicator of Remodeling Activity Index (LIRA) is a quarterly measure of short-term national home improvement spending on owner-occupied homes produced by the Joint Center for Housing Studies at Harvard University (JCHS). The index projects out four-quarters of remodeling activity and, in its most recent update, signaled that activity could reach a new peak in 2022.
• Historical estimates show that activity has steadily increased over the past several quarters. Utilizing a four-quarter moving percent change, after falling from a Q1 2020 peak of 3.2% to a pandemic-low of 1.5% in Q3 2020, the activity has accelerated in each successive quarter, reaching a four-quarter moving average of 9.4% in Q4 2021.
• JCHS projects that the moving average will rise to 11.3% in Q1 2022 before accelerating faster into Q2, with a forecast of 15.2%. The acceleration in activity is expected to peak in Q3 2022 at 19.7% before receding modestly to 17.3% in Q4.

 

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf
• https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
• (2) https://www.jdsupra.com/legalnews/the-effect-of-us-sanctions-against-7609385/
• https://www.gravel2gavel.com/commercial-real-estate-brokerages-in-an-uncertain-russian-market/
• (3) https://www.eia.gov/outlooks/steo/
• (4) https://www.bls.gov/news.release/cpi.nr0.htm
• (5) https://www.bls.gov/news.release/jolts.nr0.htm
• (6) https://www.census.gov/econ/bfs/data.html
• (7) https://www.kastle.com/safety-wellness/getting-america-back-to-work/
• (8) https://www.environmentalleader.com/2022/03/deloitte-survey-finds-companies-are-working-toward-more-transparent-esg-plans/
• (9) https://www.pewresearch.org/fact-tank/2022/03/09/majority-of-workers-who-quit-a-job-in-2021-cite-low-pay-no-opportunities-for-advancement-feeling-disrespected/
• (10) https://www.jchs.harvard.edu/press-releases/boom-home-remodeling-may-peak-2022

1. COMMERCIAL REAL ESTATE DEAL VOLUME

• After a large swath of investors sat on the sidelines in 2020, last year proved to be the most active year for commercial real estate sales on record. According to Real Capital Analytics, $808.7 billion of U.S. CRE assets changed hands in 2021— an 87.8% increase over 2020’s pandemic impacted total and an equally impressive 34.8% above 2019’s previously held peak.
• Of the core-four commercial property types (Apartment, Office, Retail, and Industrial), the Office sector was the only one to not see 2021 transaction volumes eclipse their 2019 peak. While transaction volumes did rise by a reassuring 56.5% year-over-year, they remained down from 2019’s levels by 3.5%.
• Apartment transaction volumes surged to new heights in 2021, totaling $335.3 billion last year— just shy of the total set in 2019 and 2020 combined. Measured 2021’s deal volume total grew by 128.2% year-over-year. Moreover, last year’s final tally stands 73.6% higher than the total set in 2019.
• Industrial deal volume grew by 56.2% in 2021, the lowest growth rate of the core-four property types. However, the primary reason why the Industrial sector’s relative growth rate is lower than its marketpeers is that it maintained strong transaction volumes in 2020. Compared to the previously held 2019 peak, 2021’s Industrial deal volumes totals finished up by a robust 41.6%
• Retail sector deal volume recovered admirably in 2021, reaching $76.9 billion in asset sales. For the year, transaction volumes grew 87.9% compared to 2020 levels and 16.4% over its 2019 benchmark.

2. JANUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the U.S. economy added 467k jobs in January, according to the latest release.
• While January’s jobs-add was slightly below December’s addition of 510k jobs, it comes amid a typical seasonal slowdown for hiring alongside new records for U.S. COVID-19 cases.
• Wages rose by 0.7% in January month-over-month, and they are up 5.7% since January 2021. The continuing climb in wages is indicative of the market competition for labor, as higher demand during the pandemic recovery alongside tight labor supply has strengthened worker-bargaining power in ways not seen in decades.
• November and December estimates were revised up, adding a cumulative 709k jobs to their initial estimates. In the latter months of 2021, job growth consistently undershot economists’ forecasts. However, in January, the economy outperformed the Dow Jones estimate by more than 300k jobs. This may be evidence of a lag in economists factoring in COVID effects. In November and December, the rapid emergence of Omicron caught many by surprise, dampening employment results compared to most market expectations. In January, the opposite likely occurred as experts priced in high U.S. case counts, but the variant’s impact on the economy proved to be modest

3. UNEMPLOYMENT RATE

• The unemployment rate and the number of unemployed persons was little changed at 4.0% and 6.5 million, respectively, while the labor force participation rate held steady at 62.2%, according to the the latest report by the Bureau of Labor Statistics.
• Since January 2021, the unemployment rate has fallen 2.4 percentage points and the number of unemployed persons is down by 3.7 million.
• The number of workers on temporary layoff increased in January to 959k but remained down by 1.8 million since January 2021. Permanent layoffs changed little in January but remain 1.9 million below January 2021’s estimate. There are currently 1.8 million permanent job losers in the economy.
• Marginally attached workers— meaning they are not actively searching for employment, but who still would like a job, was little changed at 5.7 million while the number of persons employed part-time for economic reasons continued to trend down, standing at 3.7 million in January. Part-timers for economic reasons have declined by 2.2 million in the past year.

4. JOB OPENINGS AND LABOR TURNOVER SURVEY (JOLTS)

• According to the Bureau of Labor Statistics, there were 10.9 million openings in the U.S. as of December 31st, the latest date of availability, little changed from the month prior.
• Hires decreased by -330k to 6.3 million, a rate of 4.2%. Meanwhile, separations, which include quits, layoffs, and discharges, declined by -305k to 5.9 million. The quits rate was little changed at 2.9% but had notable decreases in sectors that had been seeing increasing turnover in the past several months, including healthcare, food services, and construction services.
• In the 12 months ending in December 2021, there were 75.3 million hires and 68.9 million separations, a net gain of 6.4 million.

5. CONSUMER SENTIMENT

• Consumer sentiment fell in January, with the index falling 4.8% from December to a reading of 67.2, its lowest level since November 2011, according to preliminary results from the University of Michigan.
• From February 2020 to April 2020, consumer sentiment experienced a sharp decrease of 28.9% before recovering in the second half of the year. As the pandemic-era-economy rebounded into 2021, so did sentiment. However, over the past nine months, as the Delta and Omicron variants took hold and inflation crept into most sectors, the sentiment index has declined sharply.
• According to the analysis by the report’s chief economist, Richard Curtin, supply chain issues and their glaring effect on purchasing prices largely contributed to both the inflation uptick and subsequent decline in consumer confidence. However, a wage-price spiral has begun to develop over the past few months, while household spending has been elevated by rapidly rising home and stock prices.
• According to the report, overall confidence in government economic policies is at its lowest level since 2014., with geopolitical risk and upcoming interest rate hikes likely contributing to jitters.

6. CMBS DELINQUENCIES

• According to Trepp, CMBS delinquencies reassumed their pattern of declines in January following an increase in December, where the delinquency rate increased for the first time since June 2020. CMBS delinquencies have now fallen in 18 of the previous 19 months.
• The January CMBS delinquency rate was 4.18%, a 39 basis point decline from December. The share of loans that were 30 days delinquent stands at 0.16%, down 33 basis points from December.
• 2.17% of loans by balance missed their January payment but were within the “grace period” of under 30 days delinquent. Loans in the grace period are up by four basis points from December.
• The percentage of loans with a special servicer fell by 42 basis points to 6.33% in January.

7. CASH PURCHASES ON THE RISE

• An analysis by RealtyTrac shows that real estate investor purchases rose from 11.7% of all transactions in Q3 2020 to 16.4% in Q3 2021. Additionally, a majority of investors continue to pay in cash— the share of all-cash purchases rose from 69.5% to 97.0% across the same period.
• The uptick in all-cash purchases is indicative of the competition for home buying as the housing market continues its hot streak amid record-low inventory. Investors who can offer cash upfront without the need for additional financing can often speed up the transaction process, in some cases limiting the need for appraisals.
• Cash purchases have also helped investors rake in significant discounts. According to the report, citing data from ATTOM, investors paid an average of 18.9% less than the median sale price of a home in Q3 2021. However, this effect is waning from earlier in the year— in Q2 2021, discounts to cash-purchasers averaged 29.4% below the median sales price.

8. HOUSEHOLD DEBT

• Household debt levels rose by 7.0% in 2021— the biggest jump since just before the Great Financial Crisis. In total, there is nearly $15.6 trillion of debt on domestic household balance sheets, 70% of which is in the form of mortgage debt.
• Rising mortgage debt was the overwhelming biggest contributor to rising household debt levels in 2021. Through Q4 2021, outstanding mortgage debt held by households is up by 8.8% year-over-year. Moreover, mortgage debt is responsible for 87% of the $1.0 trillion increase in total household debt incurred in 2021.
• Student loans, which account for the second-largest source of household indebtedness, reached $1.6 trillion through the end of 2021— a new all-time high even as interest accrual on Federally guaranteed student loans remain frozen through May 1st, 2022. Still, the 1.4% student loan debt increase marks the smallest change for the category in the lifetime of the New York Federal Reserve’s tracking, dating back to 2003.

9. FANNIE MAE HOUSING SURVEY

• Fannie Mae’s January National Housing Survey indicated broad pessimism in the housing market. The survey also showed consumers becoming more pessimistic about home purchasing as only 25% of respondents felt it was a good time to buy, down from 52% just a year before. Only 15% of respondents aged 18-34 thought January 2022 thought it was a good time to buy.
• Almost 91% of respondents expect that home rental costs will stay the same or go up with the average expected price change of around 7.4%.
• Average expectations for home increases were half of that, but a majority expected to pay higher interest rates for home purchases. Despite expectations for increased costs, two-thirds of respondents noted that they would buy a home if they were going to move.

10. GATEWAY MARKETS VS. SMALLER CITIES

• An analysis by the New York Fed suggests that real estate investments in big U.S. cities tend to yield lower returns compared to their smaller counterparts.
• The difference can be somewhat sizable, with small cities offering an annual return premium of approximately 80 basis points. The author points to risk assessments as the primary driver of the return spread.
• According to the report, smaller markets offer a return premium relative to larger markets because they are seen as riskier given that their market tends to be less liquid and less correlated with underlying factors like income growth

SUMMARY OF SOURCES
• (1) https://app.rcanalytics.com/#/trends/downloads
• (2) https://www.bls.gov/news.release/empsit.nr0.htm
• (3) https://www.bls.gov/news.release/empsit.nr0.htm
• (4) https://www.bls.gov/jlt/
• (5) http://www.sca.isr.umich.edu/
• (6) https://www.trepp.com/trepptalk/monthly-snapshot-cmbs-cre-clo-banking-january-2022
• (7) https://www.globest.com/2022/02/09/real-estate-investor-cash-home-purchases-on-the-rise/
• (8) https://www.newyorkfed.org/microeconomics/hhdc
• (9) https://www.fanniemae.com/research-and-insights/surveys/national-housing-survey
• (10) https://libertystreeteconomics.newyorkfed.org/2022/02/housing-returns-in-big-and-smallci

 

We are ready to assist investors. For questions about Commercial Real Estate Investments and Commercial investment properties, contact your Los Angeles and Long Beach commercial real estate advisors at SVN Vanguard. 

 

By Monsef Rachid | February 4, 2022

According to the Mortgage Bankers Association’s latest CREF Loan Performance Survey, delinquency rates for mortgages backed by commercial and multifamily properties declined during the final three months of 2021.

“The fourth quarter saw continued improvement in the performance of commercial and multifamily mortgages, particularly among property types that were the most impacted by the downturn,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The share of outstanding balances that are delinquent fell for both lodging and retail properties, as property owners and lenders and servicers continue to work through troubled deals. The share of loan balances becoming newly delinquent was the lowest since the onset of the pandemic.”

Key Market Findings for December 2021:

The balance of commercial and multifamily mortgages that are not current decreased slightly in December 2021.

• 97.0% of outstanding loan balances were current, up from 96.7% at the end of the third quarter of 2021.
• 1.9% were 90+ days delinquent or in REO, down from 2.2% three months earlier.
• 0.2% were 60-90 days delinquent, unchanged from three months earlier.
• 0.3% were 30-60 days delinquent, unchanged from three months earlier.
• 0.7% were less than 30 days delinquent, down from 0.8% from three months earlier.

Loans backed by lodging and retail properties continue to see the greatest stress, but also saw improvement during the fourth quarter of 2021.

• 10.5% of the balance of lodging loans were delinquent, down from 14.0% at the end of the third quarter of 2021.
• 7.6% of the balance of retail loan balances were delinquent, down from 8.2% three months earlier.
• 2.1% of the balances of industrial property loans were non-current, up from 1.8% three months earlier.
• 1.8% of the balances of office property loans were non-current, unchanged from three months earlier.
• 1.4% of multifamily balances were non-current, up from 1.3% three months earlier.

Because of the concentration of hotel and retail loans, CMBS loan delinquency rates are higher than other capital sources, but also saw improvement during the final three months of 2021.

• 5.7% of CMBS loan balances were non-current, down from 7.2% in last year’s third quarter.
• Non-current rates for other capital sources were more moderate.
• 2.2% of FHA multifamily and health care loan balances were non-current, up from 2.0% three months earlier.
• 1.6% of life company loan balances were non-current, up from 1.2% three months earlier.
• 0.6% of GSE loan balances were non-current, unchanged from three months earlier.

 

By Lynn Pollack | February 01, 2022

Inflation is as high as it’s been in years, but that’s with respect to goods and labor.

Developers should break ground on new projects now, while the cost of capital remains low—despite rising inflation, according to one industry expert.

“The question my clients ask me almost every single day is, do I put the shovel in the ground today or do I wait a year from now when we might see lower inflation. The bottom line is it’s better to put the shovel in the ground today,” CBRE’s Spencer Levy told CNBC last week. “Yes, inflation is as high as it’s been in years, but that’s with respect to goods and labor. But the cost of capital is still relatively low.”

Levy predicts that demand will keep pace and shortages in housing and industrial will persist into the next year, and says “the cost of capital is lower today than it will be a year from now.”

When asked if we’re approaching bubble territory, Levy said he isn’t worried.

“One of the great things about the commercial real estate industry is that it’s somewhat self-regulating with the respect to the type of construction you’re seeing, he told CNBC most construction is in high-demand, low-supply property types like industrial and multifamily, not in sectors like office or retail.

“As a matter of fact, if you take a look at last year, we saw unbelievable rent growth in multifamily and industrial, the areas where we’re seeing the most construction,” he pointed out. And while that rent growth won’t continue at the same eye-popping levels we’ve seen as of late, Levy told CNBC he expects advanced growth in 2022 and beyond as long as rate hikes stay within the three- to five-hike band most experts are predicting.

“Long term, modestly rising interest rates and inflation has actually been good for commercial real estate, both for rents and for property values,” he said. But “if we’re wrong on these three, four, five rate hikes, and it’s much worse than that, then you should be concerned. But if it stays in that band it’s a very favorable environment for commercial real estate.”

In fact, Levy says that even if the 10-year Treasury goes up by 100 basis points, “that’s still an incredibly low cost of capital by any measure.”

Still, it is hard to ignore that headline inflation is up 7.1% from last year, the biggest uptick since 1982.

“The Fed looks a bit panicked,” CBRE’s Richard Barkham, Global Chief Economist and Global Head of Research, said last month. “At the moment, we’re at peak inflation and I suspect it will stay there for the first half of the year and then begin to ease. It should settle back in the 2 to 3 percent range by year’s end, which is still higher than the pre-pandemic norm of about 1 to 2 percent.”

Barkham says “three rate hikes this year should be enough,” noting that while the hikes will “unnerve” the stock market, strong corporate earnings will support them.

 

By Jeffrey J. Smith | November 17, 2021

Economic, social, and digital disruptions combine to force a change in how CRE is developed, financed, and used

As we turn the corner on 2021, hopes that we would be doing the same on COVID-19 have stalled. The Delta variant has clouded the near-term outlook as vaccination, masking, and social distancing requirements have impacted commercial work and gathering facilities. The commercial real estate (CRE) industry is positioned at the forefront of the recovery: Office employers are balancing productivity and safety; retailers face critical turning points in an evolving industry; residences are competing for tenancy amid shifting migration patterns and heightened affordability concerns. Meanwhile, companies face increasing demands to prioritize environmental, social, and governance (ESG) issues, aging technology infrastructures, a tightening labor market, and increasingly differentiated competition. How the CRE industry proceeds into early 2022 could set the foundation for its success over the next several years.

Here are the key findings from Deloitte’s 2022 commercial real estate outlook:

Despite some financial concerns and an evolving regulatory environment, optimism around fundamentals prevails. Eighty percent of respondents expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate. Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Many CRE firms are focusing on retrofitting properties and repurposing spaces for alternate uses to maximize value. However, only one-quarter of respondents say their companies are substantially increasing technology investments to bolster portfolio and asset management capabilities.

Sustainable properties are often key to a better tenant experience; building partnerships to provide new offerings to tenants can also enable real-estate-as-a-service (REaaS). Over three-fourths of respondents say their companies will likely expand partnerships with or invest in proptechs, which could help firms deploy the REaaS delivery model.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape. The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most CRE companies are in the early stages of addressing climate risk; respondents indicated sustainability concerns, and the need to address them were priorities in this year’s survey. But in the wake of the pandemic and community demands for more equitable playing fields, CRE leaders should also prioritize social issues and diversity, equity, and inclusion (DE&I) initiatives. The CRE industry has a long way to go to achieve equitable representation.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape.

The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate.

Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Real Estate Industry Services

By Erik Sherman | November 08, 2021 | Originally Posted on GlobeSt.com
The benefits of the new spending to real estate are largely indirect.

After more legislative drama than found in a West Wing rerun, the House passed the infrastructure bill, which now goes to President Biden’s desk for an expected signature.

The biggest story is not what it is, but what it isn’t. The original proposal was $2.6 trillion, according to a New York Times breakdown from August. The plan had included many items that wouldn’t make the cut: housing, schools, home- and community-based care, R&D and manufacturing, and more.

What passed was $1.2 trillion in spending. But it wasn’t all new, as $650 billion was extending previous spending. New spending of roughly $550 billion, mostly over five years, breaks out as follows, according to CNN.

• Roads, bridges, and major infrastructure: $110 billion
• Public transit: $39 billion
• Railways: $66 billion
• Power grid: $65 billion
• Electric vehicles, buses, and charging stations: $15 billion<
• Airports and seaports: $42 billion
• Resilience and climate change: $50 billion
• Water infrastructure: $50 billion
• Broadband: $65 billion
• Environmental spending: $21 billion
• Transportation safety: $11 billion
• Reconnect communities: $1 billion

Bloomberg News points to a number of funding sources for the bill, including unspent pandemic relief funds, assumptions of greater economic growth leading to increased tax revenue, states that ended unemployment benefits early and in doing so reduced the need for that federal money, spectrum auction sales, and more. There is disagreement over how much the measure will add to the deficit. The Congressional Budget Office expects the measure to add $256 billion over a decade.

Nothing in the bill directly speaks to real estate, but there are expectations that the industry would benefit indirectly. “While real estate is not included in the plan, real estate inherently needs strong infrastructure to be useful for tenants,” said a recent report from BlackRock.

For example, flood mitigation, new tax revenues to states, better transportation and communications, and improved power and water services are all positive for business in general, which would then presumably need more services from CRE.

One potential issue is that increased construction spending on infrastructure would increase demand for materials and labor that might drive up costs for CRE.

 

Are you looking to purchase or sell Orange County Commercial real estate? Do you need to lease Orange County commercial real estate? SVN | Vanguard provides industry-specific real estate services across a variety of asset classes throughout Southern California. Our market-specific commercial real estate expertise and experience are at the forefront of our practice. We advise clients to ensure informed decisions. Whether the property is in Orange, San Diego, Riverside, Los Angeles, or San Bernardino Counties, SVN | Vanguard offers our clients a competitive edge. The first step in our approach to every transaction is to listen. It is our job to understand client goals and how they relate to market conditions. We offer insight and guidance as we navigate each unique situation.

 

For more information, contact SVN Vanguard.

1. OFFICE DEMAND

• Demand for office space rose in August, following a sluggish July where the delta variant reduced the speed of growth across key economic indicators, according to the latest report from VTS. The VTS office demand index (VODI) rose by 3.65% month-over-month to 87 in August, the highest level since the pandemic began. To date, the VODI remains -13% below its pre-pandemic benchmark.
• On a year-over-year basis, office demand has risen by 235%, easing earlier concerns that the pandemic’s crushing of the office sector in 2020 would become a longer-term, secular shift. While lingering public health concerns and a new remote-work economy still present downside risks to the sector, demand has now climbed in eight of the past nine months and has recovered 84.4% of its post-COVID drop.
• Employment within “office-using” sectors rebounded in July (the latest month of data availability), charting an annualized growth rate of 4.3%, a stark contrast from the 0.8% growth rate observed in June. Using data from July’s jobs report by the BLS, the report notes that the largest increase in office-using jobs came from growth in information services employment, which saw an 11.8% annualized increase in July.

2.    CONSUMER SPENDING: RESIDENTIAL DISTRICTS VS. CBD

• A study by the Mastercard Economics Institute on consumer spending in New York City found that small-andmedium-sized businesses in residential districts have fared significantly better in their recoveries than their counterparts in central business districts.
• Spending at small businesses located in central business districts fell to 67% of their 2019 levels through April 2020. Through August 2021, spending at these firms has returned to 73% of 2019 levels. Comparatively, spending at businesses in residential neighborhoods, which fell to 85% of their 2019 levels through April 2020, have since grown past their pre-pandemic marks and sit 124% above 2019 their year-to-date mark.
• While the study focused on the NYC metro, similar trends have affected cities across the world. Globally, spending in central business districts remains roughly 33% below pre-pandemic levels through August 2021.

3.    HUD RULE ON TENANTS FACING EVICTION

• On October 7th, the Department of Housing and Urban Development (HUD) introduced a new rule that requires public housing agencies to notify tenants of public housing or project-based rental assistance programs of information related to Emergency Rental Assistance (ERA) programs before they can be evicted. The rule will not apply to recipients of Section 8 Housing Choice Vouchers.
• The new policy will also amend a standard eviction policy for public housing agencies, extending the window in which they must provide a written notice to a tenant regarding their eviction from 14 days before to the eviction date to 30 days.
• The new rule is effective immediately and comes amid a stubbornly slow rollout of funds from the ERA fund, a COVID-era federal program that facilitates rental aid to tenants impacted by the pandemic’s fallout. In discussing the implementation of this new policy, HUD states its intent to “act to prevent a wave of preventable evictions that will interfere with the program’s accomplishment of HUD’s mission.”

4.    CONSTRUCTION SPENDING

• According to the Census Bureau, the seasonally adjusted value of new US construction put in place totaled an annualized $1.58 trillion as of August 2021— a new all-time high and an 8.9% improvement from one year ago.
• Residential construction unsurprisingly posted the highest growth rate for the year ending August 2021, with the total value of new construction put in place rising a stratospheric 23.9%.
• New put in place construction for lodging and office properties both remain down on a year-over-year basis, falling 31.1% and 5.0%, respectively. While office construction has started to recover slightly, lodging continues to slide to new pandemic-era depths.
• Commercial construction, which includes both retail properties as well as warehouses and distribution facilities amongst other uses, is up 6.9% year-over-year.

5.   GOLDMAN CUTS US GROWTH FORECAST

• Goldman Sachs revised down its projections for 2021 US economic growth by 10 bps from 5.7% to 5.6%. Their forecast for 2022 GDP fell further, revised down from 4.4% to 4.0%. Notably, the bank revised up its projections for 2023 and 2024.
• According to the bank’s team of researchers, the updated forecast reflects the impact of a longer-lasting “virus drag” on sensitive consumer services alongside the weakening of reopening-influenced demand, which has driven the elevated spending seen in recent months.
• Further, economists have grown concerned about a prolonging of supply chain issues that have arisen during the pandemic economy, most notably a global semi-conductor shortage, which has contributed to price inflation in highly popular consumer products.
• Looking past 2021, the team factored in the tapering of fiscal stimulus and its likely impact on consumption. What remains to be seen, the researchers say, is whether consumer spending on services will pick up from pandemic lows to offset the likely fall in goods-related spending.

6.    MORTGAGE APPLICATIONS

• According to a recent survey by the Mortgage Bankers Association, mortgage applications decreased

by 6.9% week-over-week during the week ending on October 1st, 2021, falling to its lowest level in three months.

• This comes amid the backdrop of an increase in the 30-year fixed rate to 3.14%, its highest weekly mark since July. As mortgage rates rise, borrowers’ incentive to refinance decreases. The Refinance Index, a submetric within the survey, fell by 10% from the week prior and was 16% lower than the same week one year ago. Refinance’s share of mortgage activity now stands at 64.5%.
• Noteworthily, purchases have also fallen in recent weeks, but higher-balance loans driven by high sales prices and continuing home price appreciation are offsetting the impact of lower activity.
• The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA stands at 3.12% in the latest reading, while the average rate on 15-year fixed-rate mortgages stands at 2.45%.

7.  ZOMBIE PROPERTIES

• A newly released report by ATTOM finds that 1.3 million residential properties sit vacant in the US, representing 1.4% of all homes. However, on a more positive note, the total number of vacant homes in preforeclosure fell 6.7% quarter-over-quarter and 5.3% from a year earlier.
• The number of properties that are in the process of foreclosure has also fallen, down 3.7% quarter-overquarter and 0.2% year-over-year. The share of pre-foreclosure properties that have been abandoned, or socalled “zombie properties,” have dropped 0.1% quarter-over-quarter to 3.5%.
• On the state level, New York retains the highest level of zombie properties (2,053), followed by Ohio (939) and Florida (912), but each state’s high population and asset counts greatly contribute to their standing. On a quarter-over-quarter basis, Maryland saw the steepest relative decline in “zombie” foreclosures, falling 39%. Following next was Massachusetts (down 26%) and New Mexico (down 24%).
• The survey arrives just after the conclusion of a year-and-a-half-long foreclosure moratorium that sunset in August. Some states still maintained some forms of protection throughout Q3, while court rules and delays in certain jurisdictions have also stalled foreclosure activity. Activity in Q4 should help paint a fuller picture of the market’s post-moratoria trend.

8.    TREPP DELINQUENCY DATA

• CMBS delinquency rates continued to improve in September, falling 39 bps from August to 5.25%, according to figures reported by Trepp.
• Delinquency rates have now declined for 15 consecutive months following COVID-provoked jumps in May and June of 2020. While the pace improvement slowed to begin the summer of 2021, it re-accelerated in August and September. Compared to one year ago, the CMBS delinquency rate is down 3.67%.
• Retail and lodging CMBS delinquency rates have remained stubbornly high during the ongoing recovery. The Retail CMBS delinquency rate improved by 68 bps to land at 9.75%. Lodging CMBS delinquency rates also improved by an encouraging 60 bps from the previous month, bring the tally down to 11.45%.
• Industrial CMBS delinquency rates sit at 0.59% through September 2021. Even during the worst of last year’s shutdown, industrial CMBS delinquency rates never eclipsed 2%.
• Office CMBS delinquency rates fell by 10 bps in September to land at 2.02%. Following a slight uptick in July, Office CMBS delinquency rates have started to trend in a more positive direction again.

9.    EMPLOYMENT SITUATION

• Total nonfarm employment rose by 194,000 in September, far below the 500,000 jobs forecasted by the Dow Jones Survey of Economists and out of step with the average monthly growth of 561,000 jobs seen throughout 2021. Employment levels remain 5 million below the pre-pandemic high.
• The Unemployment rate fell by 40 bps to 4.8% in September, with an estimated 710,000 decline in the number of unemployed persons. The Labor force participation rate was little changed. Unemployment numbers, taken from the Household Survey, have marked notable discrepancies from jobs data, which is taken from the establishment survey, most likely due to data-collection constraints from the pandemic.
• One of the more notable points in the recent survey showed a decline in local government education employment, which dropped by a seasonally adjusted 144,000 amid the back-to-school push (when hiring in the sector typically picks up). The BLS notes that pandemic-related staffing fluctuations make interpreting the trend difficult, but it still raises concerns that the economy-wide labor market shortage could impact efforts to return children to schools and could further complicate the practicality of various vaccine mandates being instituted for teachers across the country.

10.   JOB OPENINGS AND LABOR TURNOVER SUMMARY

• Job openings declined to 10.4 million during the last business day of August, following an all-time high of 11.1 million in July, according to the BLS’ latest JOLTS data. The largest decreases were in health care and social services, accommodation and food services, and state and local government education.
• Hires fell to 6.3 million in August, down from 6.8 million in the previous month. Meanwhile, separations were little changed at 6.0 million. Quits climbed to an all-time high of 4.3 million during August— 17.7% above its pre-pandemic peak.
• Despite the decline, filing job openings remains a difficult task for firms across multiple industries. Combined with the underwhelming job growth numbers seen in the recent September jobs report, the resulting labor market shortage has challenged the stability of the economic recovery. Hiring difficulties have contributed to recent inflationary pressures and, in many cases, have prevented firms from taking advantage of existing sales opportunities.

SUMMARY OF SOURCES

• https://vts.drift.click/september-vodi (1)
• https://www.mastercardservices.com/en/recovery-insights/small-business-reset/challenges-and-opportunitiesaround-globe (2)
• https://www.federalregister.gov/documents/2021/10/07/2021-21960/extension-of-time-and-requireddisclosures-for-notification-of-nonpayment-of-rent (3)
• https://www.census.gov/construction/c30/release.html (4)
• https://www.marketwatch.com/story/goldman-economists-cut-u-s-growth-forecasts-for-2021-2022reports-11633907471 (5)
• https://www.mba.org/2021-press-releases/october/mortgage-applications-decrease-in-latest-mba-weeklysurvey (6)
• https://www.attomdata.com/news/market-trends/foreclosures/attom-q3-2021-vacant-property-and-zombieforeclosure-report/ (7)
• https://www.trepp.com/hubfs/Trepp%20September%202021%20CMBS%20Delinquency%20Report.pdf (8)
• https://www.bls.gov/news.release/empsit.nr0.htm (9)
• https://www.bls.gov/news.release/jolts.nr0.htm (10)

1. BEIGE BOOK – ECONOMIC ACTIVITY
• Economic growth downgraded slightly in July and August, according to the September release of the Federal Reserve’s Beige Book. Manufacturing, transportation, non-financial services, and residential real estate stood out as stronger than average sectors during the survey period. According to the analysis, the slowdown in economic activity was largely due to a weakening in demand for dining out, travel, and tourism, presumably stemming from the rise of the Delta variant.
• Supply disruptions and labor shortages also continue to dampen growth in some areas of the economy, particularly auto sales— which have been impacted by a worldwide microchip shortage, and home sales, which suffer from persistently low inventories. Both residential and non-residential construction rose across districts during the latest survey period, with loan volumes varying widely.
• All districts reported rising employment, but most also continued to note a persistent shortage of available workers that in many cases, are impeding business activity. Early retirements, childcare needs, challenges in negotiating job offers, and the presence of enhanced unemployment benefits were noted as the largest barriers constraining hiring.

2. VTS OFFICE DEMAND INDEX (VODI)
• Office demand decreased in July following six consecutive months of growth, according to the latest reading of the VTS Office Demand Index (VODI). The VODI dropped 1.2% month-over-month, the steepest fall in the index since December 2020. Office demand is up 252% year-over-year— largely a base effect from the steep fall in economic activity in early-to-mid 2020 but remains 16% below its 2018-2019 average. Office demand fell as low as -84% below its pre-pandemic benchmark during June of last year.
• As was the case during the last time the VODI fell this steeply on a month-over-month basis, the nation saw a significant uptick in COVID cases during July’s decline. According to VTS, 6 out of the 7 metros tracked in the survey reported an uptick in cases during the month of July, with Seattle being the lone exception.

3. CALIFORNIA ZONING LAW CHANGES
• On August 26th, The California State Assembly passed a bill that would allow for the construction of two-unit buildings on lots previously zoned for single-family housing only. If signed, the new law would supersede existing zoning rules on the local level.
• The new bill would allow for increased density in a state where restrictive zoning has led to some of the highest land values in the country, with median home prices in California rising by 27% in just the past year. The bill would also allow for homeowners to subdivide their current properties to up to 4 units on a single lot.
• The bill’s passing comes shortly after the August 23rd passing of a bill that makes it easier for multifamily construction by simplifying the approval process in some areas.
• If successful, the push for zoning law changes in California would be a big win for industry leaders and advocates pushing for reform to address the nation’s critical housing supply shortage. With national policy leaders signaling a desire to tackle housing affordability in the US, the California bill could become a framework for zoning reform across the country.

4. PROPOSED TAX CHANGES ON PARTNERSHIPS
• The Senate Finance Committee has begun drafting legislation that would introduce new tax liabilities on business partnerships, which could potentially impact how real estate transactions take place.
• The proposal would require partnerships to use the “remedial” allocation method during tax filing, which would limit the ability for partners to shift gains and their related tax liabilities between each other.
• Current law affords partners the choice of revaluing their assets upon the change in the interests of one of the partners, but the new proposal would require such revaluing. Critics note that the mandatory review would remove flexibility afforded to commercial real estate partnerships and could delay transactions. The National Association of Home Builders has announced opposition to the legislation.

5. JOBS REPORT
• The August Jobs Report arrived underneath most forecasts, adding just 235,000 jobs in the month according to the BLS. Economists surveyed by Dow Jones projected up to 720,000 new hires in the month, but public health fears and an activity slowdown that accompanied the emergence of the delta variant likely caused more of a shock than many predicted.
• For the first time in six months, the leisure and hospitality sector did not lead the nation in job growth, with professional and business services rising to the top in August with 74,000 new hires. Employment in leisure and hospitality was relatively unchanged and remains 10% below February 2020 levels.
• Major industries such as construction and wholesale trade also stalled, while transportation and warehousing, private education, and manufacturing posted gains.
• Wages have continued to rise, climbing 4.3% year-over-year in August. Average hourly earnings for all employees rose by 17 cents to $30.73 and have now climbed for five consecutive months.

6. DELTA VARIANT IMPACT ON HIRING
• The emergence of the Delta variant has renewed some American’s hesitations to return to work, according to new results from the Census Bureau’s Household Pulse Survey (HPS).
• Results from the survey conducted between August 18th-30th reported that 3.2 million Americans indicated they were not working due to being “concerned about getting or spreading the coronavirus”, up from a reported 2.5 million from the survey covering July 21st to August 2nd.
• Since tracking the metric began in April 2020, the number of American’s citing COVID-risk as a barrier to returning to work peaked at 6.24 million in July 2020 and has steadily come down since. After receiving a positive boost earlier this summer as vaccines became widely available across the US, the recent negative turn in sentiment reflects the fears surrounding the recent surge stemming from the delta variant.

7. RETAIL SALES
• US retail sales rose by 70 basis points month-over-month in August following a 1.8% decline in July. Sales exceeded most economists’ expectations, with the Bloomberg survey of economist predicting a 70-basis point drop in August.
• Some industry watchers point to back-to-school shopping as a boost to retail activity, while the report also showed strength in online retailers and furniture stores as home relocation saw an uptick during the month.
• The Delta variant’s effect on the service industry has also likely shifted consumer spending to other areas of the economy, and the latest report signals that retail goods have been a beneficiary. 10 of the 13 categories outlined in the Census Bureau’s report noted increases in August, with electronics and appliances, sporting goods, and car dealers being the only categories the declined.

8. A CASE FOR RETAIL RESILIENCY
• While the retail sector of Commercial Real Estate has been the focus of much concern during the pandemic, a recent analysis by Propmodo on the success of some retail property managers in recent months has provided a case for resiliency.
• Simon Property Group, the nation’s largest mall operator, reported total sales in June 2021 that were on par with June 2019 figures, according to the analysis. Year-to-date sales through June were reportedly 13% higher than the same period in 2019.
• Similarly, National Retail Properties, another large operator, reported 98.3% occupancy and 99% rent collection across their single-tenant retail properties.
• While the Retail Sector has faced some of the worst pandemic-related headwinds of any area of the US economy, record savings being held by consumers alongside the rebound in economic activity in recent months has provided a dose of stimulus to companies that have weathered through the storm.

9. HOME BUILDING GEOGRAPHY INDEX
• The Q2 Home Building Geography Index (HBGI) produced by the National Association of Home Builders reported a consistent level of activity in the single-family sector nationwide throughout the quarter, with the multifamily sector finding higher growth in counties where affordable housing is more readily available.
• The report’s findings show a shrinking of multifamily growth within the core countries of many metro-areas compared surrounding counties. In Q2, core counties accounted for 38.7% of multifamily construction activity, down from 40.2% in Q1.
• Further, the report finds that roughly half of the US population resides in the “least-affordable” counties according to the Index’s definition, which is based on price-to-income ratios derived from the 2019 American Community Survey. Just 2.8% of the population lives in the “most-affordable” counties.

10. DIVERGING INFLATION
• A recent analysis by Bloomberg indicates a diverging pattern in price increases across different metros dating back to the beginning of the pandemic.
• Utilizing data from the BLS, the analysis shows that the steepest local increases occurred in St. Louis, climbing from an inflation rate of 2.1% year-over-year in February 2020 to 6.6% in August 2021. Other notable standouts were the Houston and Atlanta metro areas, with Houston rising from just 1.5% in February 2020 to 5.3% in August 2021. Atlanta rose from a pre-pandemic rate of 2.9% to 6.6% in the latest reading.
• Conversely, Los Angeles saw the most tepid change in local inflation, rising from a rate of 3.4% year-over[1]year in February 2020 to 4.00% in August 2021. Phoenix followed, climbing from 4.4% to 5.1%, with San Francisco close behind— rising from 2.9% to 3.7%.
• Notably, the metros with the lowest increases all started the pandemic with higher inflation rates than those that sit at the top of this analysis. Soaring housing costs, which were already prevalent in metros like Los Angeles and San Francisco before the pandemic, alongside regional migration patterns that have increased
consumer demand in smaller metros, have likely contributed to the divergence.

Have questions about Orange County commercial real estate? Looking for Orange County commercial properties for sale and lease? Contact SVN Vanguard today.

Summary of Sources
• https://www.federalreserve.gov/monetarypolicy/beigebook202109.htm (1)
• https://vts.drift.click/august-vodi (2)
• https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB9 (3)
• https://www.finance.senate.gov/imo/media/doc/Wyden%20Pass-through%20Reform%20One%20Pager.
pdf (4)
• https://www.bls.gov/news.release/empsit.nr0.htm (5)
• https://www.census.gov/programs-surveys/household-pulse-survey/data.html (6)
• https://www.census.gov/retail/index.html (7)
• https://www.propmodo.com/understanding-retails-resilience-and-lopsided-recovery/ (8)
• https://www.nahb.org/news-and-economics/housing-economics/indices/home-building-geography-index
(9)
• https://www.bloomberg.com/news/articles/2021-09-16/inflation-soared-in-some-u-s-cities-barely-budged[1]in-others (10)

As if losing a major tenant at an investment property weren’t bad enough, investors need to be aware that when a building becomes vacant there could be added risks written into the property’s insurance policies. Vandalism, “malicious mischief” and other damages are just some of the exclusions of certain insurance policies.

By Tez Warmey | July 13th, 2021

If the past year has taught us anything, it’s that in the blink of an eye, lessors can unexpectedly lose even a top producing retail tenant. When a business declares bankruptcy, the business is removed from the property and the building may sit vacant for a long time. While business owners have to deal with huge losses in their revenue, property owners face a loss in their own revenue plus the stress that can arise from insurance coverage exclusions for their vacant buildings.

With all insurance companies, there are policy exclusions which are carefully noted on the policy itself. These policies must be read carefully before entering into any contractual obligation with an insurance provider. Before any policy is drafted, the insurance company makes its own assessment of the building. Here, the insurer weighs the risks and benefits involved in insuring a specific property. For instance, if a building is actively occupied and a tenant conducts business there regularly, the risks of vandalism and “malicious mischief” are relatively low. A vacant building, however, where no business activities take place, can be an easy target for vandals.

Insurance policies usually indicate that if a building is vacant or unoccupied for around 30 to 60 days, or more, then the policy won’t cover certain losses, such as damage done to the building by vandalism, “malicious mischief” and other destruction of property. It is absolutely essential for a property owner to be aware of these policy coverage exclusions as they vary from company to company.

This particular insurance exclusion has driven a lot of legal action between owners and insurance companies as of late. There is much back and forth between both parties in terms of the difference between “vacant” and “unoccupied.” If very limited activities are happening in the building, it might be “vacant” but not “unoccupied,” or vice versa.

Instead of budgeting for hefty lawyer fees, a smart investor should be proactive and make sure his or her insurance policy is clear with regards to unforeseen damages that may arise from vacancies. Is there a “vacancy exclusion” and if so, what isn’t covered in the vacancy exclusion?

In some cases, it may be a good rule of thumb for a property owner to notify their insurance provider if the building will be vacant or unoccupied. This information will usually lead to a reassessment of insurance coverage, which may bring about a renegotiation or cancellation of coverage, if the policy holder and insurance provider are not able to compromise on the contract revision. A savvy owner should read his/her policy and weigh out risks and benefits in relation to insurance policy exclusions before needing to file a claim, rather than after.

At SVN Vanguard, we are committed to helping property owners and tenants alike. Do you have a vacant Orange County commercial property? We are experts in Orange County Commercial Real Estate For Lease and Sale. SVN Vanguard has headquarters in Orange County as well as San Diego. We happily serve all of Southern California. Contact us for a property evaluation, leasing information and more.