For Multifamily Borrowers, Changes Are Coming

Inflation has accelerated at its quickest rate in 40 years. As the second half of 2022 begins, inflation has some borrowers rethinking borrowing.

Borrowers are turning toward alternate sources such debt funds, bridge funds, community bank loans, and life company loans. With advantageous conditions offering more revenues to fund value-add or other investment plans, these alternative methods of funding are becoming more attractive.Fannie Mae and Freddie Mac still provide funding because these agency loans continue to be a popular choice for many borrowers in spite of the competition. Agency lenders may wish to be mindful of the following factors impacting multi-family borrowers in addition to inflation-related worries:

Updated Standards for Radon Testing & Mitigation
In Colorado and New Jersey, American National Standards Institute (ANSI)/AARST (American Association of Radon Scientists) standards have been approved. The new rules went into effect in Colorado on July 1, 2022, and they go into force in New Jersey on December 3, 2022. To be deemed a Radon Professional qualified to conduct testing and undertake mitigation, both states require state-specific licensing. Additionally, for multifamily complexes, these states will call for sampling of all ground-level units in addition to 10% of upper level units. Minnesota, Iowa, Indiana, Illinois, Ohio, Pennsylvania, and Maine are among the states that have already embraced the ANSI/AARST criteria for multifamily properties. Every state, with the exception of Colorado, has an exemption code. Ask your provider of due diligence if your property qualifies for that exemption code.

Numerous federal and state agencies, including the Department of Housing and Urban Development (HUD) and the Environmental Protection Agency, use the national consensus ANSI/AARST Radon Standards of Practice (EPA). Here is a list of national consensus standards for various building types.

California SB-721 Deadline Approaching

By January 2025, owners of multifamily buildings in California must abide by SB-721. 2018 saw the signing of California Senate Bill 721, sometimes known as the Balcony Bill. After a balcony collapse in Berkeley, California claimed the lives of six students and seriously injured another seven, SB-721 was passed into law. The law mandates examination and retrofitting of Exterior Elevated Elements (EEE) such balconies, decks, staircases, and pathways in multifamily structures with three units or more. The assessment of a piece of EEE by an engineer, architect, or other certified provider is required by building owners in order to identify any urgent hazards and suggested countermeasures. The initial inspection shall be done for each and every impacted building prior to January 1, 2025. Timelines for reporting, obtaining permits, and making repairs apply, and subsequent reviews are required every six years. More detail on SB-721 can be found here.

Lastly, some would wonder if agency lenders will adhere to the 2022 loan limits. In order to boost the multifamily sector, the Federal Housing Finance Agency (FHFA) raised the multifamily loan purchase caps for each entity in October 2021, totaling a combined $156 billion. The FHFA required that, in addition to the caps, 50% of the loan volume be used for mission-driven, affordable housing or other mission-oriented businesses. This made sure that affordable housing and traditionally neglected markets received adequate investment. We have seen an increase in Fannie/Freddie lending activity over the past few weeks. Agency loans are now slightly more competitive as a result of market pressure and the requirement to reach the cap. Considering the current pattern, we do anticipate that the 2022 caps will be met.

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

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.

According to a notice published in the Federal Register, the Office of the Comptroller of the Currency, Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration are debating a new policy statement. The change would modify a policy that was initially put into place in 2009 following the financial crisis of the time.

The announcement states “the agencies are proposing to update and expand the 2009 Statement by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses (proposed Statement).” The notification goes on, “In developing the proposed Statement, the agencies consulted with state bank and credit union regulators. If finalized, the proposed Statement would supersede the 2009 Statement for all supervised financial institutions.”

The focus of the proposed statement stresses the value of “working constructively with CRE borrowers who are experiencing financial difficulty and would be appropriate for all supervised financial institutions engaged in CRE lending that apply U.S. generally accepted accounting principles (GAAP)” and acknowledges that accommodations and workouts are frequently in the best interest of both parties.

Two important themes from the 2009 declaration continue to be supported by the statement, which is significant. One is that, even if the amended loans have flaws, a lending institution won’t face criticism for making a “prudent CRE loan accommodation.” The second is that because the value of the collateral is smaller than the loan total, the modified loans won’t be classified negatively as long as the borrower has the ability to repay under fair circumstances.

The suggested amendments would affect three areas. These arrangements are described as tools “to mitigate adverse effects on borrowers and would encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations during periods of financial stress” in a new section on short-term loan accommodations.

Secondly, beginning in 20009 there have been modifications to GAAP accounting, including CECL, or current anticipated credit losses. “In particular, the section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.”

The Financial Accounting Standards Board (FASB) “ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” is also mentioned. Financial institutions won’t be required to classify and account for loan modifications as troubled debt restructuring, once this standard is implemented.

Lasty, CRE exercise examples would be modified. “The examples in the proposed Statement are intended to illustrate the application of existing guidance on (1) credit classification, (2) determination of nonaccrual status, and (3) determination of TDR status.”

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

Even if demand declines, the industry will be able to survive because to limited multifamily building.

Despite worries about a recession, analysts believe that slower building will likely maintain a balance between supply and demand for multifamily housing for some time.

Three Moody’s economists argue in a recent analysis that “housing substitutability” can shift demand to the sector, so even if multifamily demand cools, restricted multifamily building will help preserve the sector. As the average property is currently approximately 44% more expensive than in 2019, would-be buyers of single-family houses are choosing to rent rather than buy, which in turn is boosting demand for multifamily units. The increase in short-term rates and their effects on mortgage rates are further exacerbating it, and Moody’s observes that there are already indications of markets cooling in several of the areas where prices rose most swiftly during the pandemic.

The Moody’s report states: “Although this may not lead to a widespread slashing of housing prices everywhere, housing price declines are a real possibility in the next few quarters or years depending on how severe and how long the next recession will be if there is one. Multifamily rents, on the other hand, are generally slower to respond to rising interest rates and remain more stable. If the substitutability within housing matches the Great Recession’s strength, then multifamily rents may remain elevated for some time until single-family housing stabilizes. Based on the past few recessions, the effect on multifamily performance may not begin until near or after a recession ends.”

The demand for multifamily housing is also likely to be sustained by low unemployment and a competitive labor market, which was not the case in prior recessions (as in the 1980s, when unemployment topped 9 percent ). However, while household balance sheets are usually doing better than they did during prior downturns, personal incomes with disposable cash are declining.

“As the multifamily and single-family home affordability crisis intensifies across more and more metros nationwide, this diminishing financial safety net is troubling, even for multifamily,” Moody’s notes. “Job losses or affordability issues could force some renters to find roommates or put off that move to single living.”

Strengthened financial regulations “may be a godsend” for multifamily, according to Moody’s analysts.

“Even if the Federal Reserve fails to engineer a soft landing this year or next, these rules will likely prevent the real estate market from sliding into a deep and long recession or suffering large aftershocks,” the trio wrote. “While many single-family markets will likely see small to moderate prices decline in this situation, multifamily’s positive performance should hold up relatively longer, as in previous downturns. Overall, in a mild recessionary environment, we would expect only a moderate vacancy rate increase and rent growth to simply decelerate. A slight and short-lived dip into negative territory towards the end of the recession is possible, but a free fall is highly unlikely.”

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

Experts say the cost of financing will keep rising to unprecedented levels.

The benchmark interest rate set by the Federal Reserve has increased by 75 basis points for a second consecutive month. The goal range for overnight interbank lending is 2.25 percent to 2.5 percent, and as it rises, so do many other interest rates, including those that commercial real estate companies will have to pay to get credit.

According to Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, “The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected.” The majority of market participants in commercial real estate are likely to have anticipated this, especially lenders as they have seen loan interest rates climb by more than 50 basis points in 2022, primarily in the second quarter. As a result, asset values are under pressure, and lender profits and borrower returns are constrained. Therefore, [as the industry evaluates the near-term future], [we predict] both loan issuance and commercial real estate sales volume to decline in Q2.

The Federal Open Market Committee of the Federal Reserve, which is tasked with containing both inflation and unemployment, justified its actions by highlighting recent steady job growth, high inflation, widespread pricing pressures, and Russia’s ongoing invasion of Ukraine.

Stephen Bittel, founder and chairman of Terranova Corporation, says there is a clear gap between expectations of buyers and sellers in our current investment climate. “..sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Bittel. He adds, “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”

Commercial real estate is already feeling the effects. According to Adil Hasan, director of real estate at Yieldstreet, “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed.” Hasan notes that, “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines.” He also argues that the, “…rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”

Investors who made real estate purchases three years ago and are trying to roll over financing are getting one-year extensions from their lenders, according to Bill Doyle, co-founder and managing director at Equity Oak Ventures. Due to a significant decrease in appraiser valuation, he says, “All forms of lenders, especially debt funds, are in need to rebalance those notes.” The continuing rate increases only put more pressure on the need to rebalance mortgages. Experts note that in the debt market, the next 90-120 days will determine whether existing mortgages will need to be extended, refinanced,or ultimately handed back to lenders.

Some, however, do stand to benefit from the current state of the lending market. Hasan points out that, “This could present some attractive acquisition opportunities for investors that have the capital available.”

These programs, which are provided by schools, universities, and business associations, are influencing the subsequent generation of CRE leaders.

People wishing to expand their skill sets within the commercial real estate market can now access a wide range of resources. Although they were not as common in the past, commercial real estate-specific degrees and certifications have become more and more popular in recent years. Young professionals with formal educations in commercial real estate are now more prevalent in the labor market.

According to Thomas Sherlock, a principal at Talonvest Capital, “Having a formal education in commercial real estate is an opportunity and advantage for anyone interested in a CRE career, For many individuals, that formal education provides the opportunity to start a career with a greater understanding of important fundamental factors in a variety of the industry’s interconnected specialties.”

While working in the industry, many seasoned experts are obtaining qualifications in commercial real estate.

At the Marshall Bennett Institute of Real Estate at Roosevelt University, Catherine Hughey is pursuing a Master of Science in Real Estate while also enrolling in two in-person evening courses. She also serves as general manager for JLL at the modern, 473,000 square foot 800 Fulton office skyscraper in Chicago’s Fulton Market. Hughey, a lifelong learner who graduated from Project REAP – Chicago in 2018, holds real estate broker licenses in Wisconsin and Illinois. She participates in both the BOMA/Chicago Diversity and Inclusion Committee and the JLL Midwest PM Diversity and Inclusion Committee.

Hughey declared, “You can’t lose. The Marshall Bennett Institute of Real Estate gives you all the tools you need to win, and all the instructors make the classes interesting.”

There are numerous reputable programs given by colleges, universities, and organizations that offer classes, real-life experience, practical knowledge, problem solving, group projects, and internship opportunities to match the career objectives of persons like Hughey. not to mention the intangible advantages like networking and mentoring. For instance, Chloe Asnes, a member of the George Washington University School of Business’s 2022 graduating class, says that the school’s real estate undergraduate concentration has a sizable and vibrant student body. “We are very fortunate to have engaged alumni who mentor students, help us expand our networks and provide us with technical training and interview prep,” according to the speaker.

These programs prepare the next generation of business executives for the opportunities and difficulties presented by commercial real estate by awarding a variety of degrees and certificates. The Advanced Management Development Program in Real Estate at Harvard University Graduate School of Design is where Sinobo Group’s director of asset management, Angela Han, is enrolled. She claims that the training is quite useful and covers a variety of topics in addition to only the high-level technology in buildings.“The program introduced the different standards that buildings can seek, LEED, WELL, etc., but also gave insight into the cost/benefit of which of these to pursue depending on the project you are working on. It also discussed the technological and practical overlap of different standards—some have more similarity, while others are very different. And the group discussion challenged us to think about the pros and cons of the different standards for our different projects.

For students who may not desire to pursue a university degree, there are other options. For instance, the CCIM designation is a demanding program of advanced study and training in financial and market analysis offered by the CCIM Institute. Students who want to receive the designation must enroll in classes, present a portfolio of relevant experience for review by a special committee, and pass a one-day exam. According to Karl Landreneau, a senior instructor at the CCIM Institute, “one of the biggest advantages of a CCIM Institute education is that all courses are taught by instructors who are CRE practitioners. The instructors are certified and trained, required to attend two adult education courses annually, and are also graded by their students.”

Another illustration is Project REAP, a diversity initiative for the commercial real estate sector that also provides an 8–10 week continuing education course on the fundamentals of real estate asset classes and its different functional disciplines, such as finance, leasing, property management, investment, brokerage, and development.

We are ready to assist investors. For questions about Commercial Real Estate for rent and Commercial Real Estate Listings, contact your Los Angeles commercial real estate advisors at SVN Vanguard.

Multifamily rent increases cost landlords.

Since the pandemic threw the status quo on its head and rattled it, multifamily has been one of the gleaming aspects of commercial real estate, along with industrial. Rent growth’s capacity to continue justifies lower cap rates and contributes to price increases.

But nothing can remain in one place for ever. The ordinary person still has a salary that trails inflation despite a strong employment market, according to research on multifamily rents. Additionally, when consumers pay more, they frequently expect something worthwhile in return.

The “2022 State of Resident Experience Management Report” from Zego came to that conclusion. The analysis stated that, “Renters are going to see increases for the foreseeable future, albeit, not at such drastic rates,”. According to projections made by the National Apartment Association, annual rent growth will continue to increase through 2022, albeit at a moderate rate of 6.3 percent to 7.0 percent.

Although the industry may use the phrase “moderate,” consumers are unlikely to. The rule of 70, a quick calculation for the time required to double a value accomplished by multiplying the percentage rate of increase into 70, makes the amount even bigger than it might appear. Given all other factors being equal and a 7 percent annual growth, someone renting an apartment for $1,500 a month would end up spending $3,000 in 2032.

The turnover cost is at what is probably a record level when people leave, such as when they relocate to a place that is more inexpensive for them or that they believe offers a value that is more in line with what they pay. Zego estimated that, compared to $3,850 in 2021, the average cost of promotion and marketing, unit maintenance, concessions, and missed rent will be $3,976.

It would take 17.6 months to repay the turnover costs if you increased the $1,500 unit’s rent by $225, or 15%. And as Zego pointed out, according to a Zumper poll, 81.6% of respondents planned to relocate in the following 12 months.

This leads to a vicious cycle. Customers demand even more with increased pricing and are more likely to leave if they don’t get what they want. People move, turnover costs are high, owners and management increase rents to try to cover the expense within a reasonable amount of time. Their online reviews also have an impact on future visitors to a location.

According to Zego, “modern living features” are the main factor in renters renewing their leases, while a lack of such elements is the main cause of their eviction. “Renters always want the best value for their money, particularly now when rent prices are at their peak. New and modern is not only attractive, but it signals that companies prioritize updating the community.” Which means investing in community façade, unit features, and building technology. The other choice is to spend money on turnovers.

Alternative assets are finally caught up by stock and bond repricings.

The fundamental tenet of Newtonian physics is that anything that ascends will eventually descend under the force of gravity unless it is caught by a soaring eagle. The Green Street Commercial Property Price Index indicates that, overall, this is what occurred to commercial real estate property prices in the second quarter of 2022.

The index, which is defined as a “time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate deals are currently being negotiated and contracted,” fell by 3.7 percent between May and June. 4.9 percent of the value has been lost overall from the peak point in March.

Overall, that is a 10% increase over the previous 12 months and a 10% increase since pre-covid periods.

Peter Rothemund, co-head of strategic research at Green Street, stated in prepared remarks that “the repricing that has occurred in bonds and stocks is finally evident in the commercial property market.Price discovery is still taking place, and economic uncertainty and interest rate volatility make that challenging, but prices of most properties are down 5%+ from recent highs. In a few sectors, pricing has held up better.”

By property type, performance varies considerably. Strip retail (down 7%) and net lease were the two worst-performing sectors between May and June (also down 7 percent ). Since before the pandemic, strip retail had increased by 7%, and in the past year while economies were recovering, it had increased by 15%. Before Covid, net lease saw a 6% growth and a 5% 12-month growth.

It’s interesting to note that the third highest decline, from May to June, was in the industrial sector, which has been particularly hot since the epidemic, growing at a rate of 42 percent and rising 15 percent over the past 12 months.

Manufactured home parks have done well generally, with a 17 percent growth over the past 12 months, up 33 percent prior to Covid, and no loss between May and June, despite general stresses on the availability and cost of rental accommodation.

Another industry that has fared well in the face of economic and societal pressures is self-storage, which has grown by 58 percent since before Covid, by 28 percent over the past 12 months, and by a lower-than-average 4 percent during the most recent recorded month.

Office decreased by only 4% in the most recent month, but was down 1% over the previous 12 months and -9% since before the epidemic. Consequently, the net result is negative.

Multifamily has increased by 15% over the past 12 months and by 16% since before the epidemic, although it has decreased by 4% during the past month.

After the sharp rise in prices in so many categories over the previous two years, it was fair to wonder how much higher prices, as well as rents paid by consumers and businesses, could rise. There were numerous indications that price growth was beginning to slow down.

Housing prices have started to decline, but the lack of available inventory has prevented a collapse, and investor purchases of SFR are rising. Over the next six months, CoStar anticipates a decline in demand for multifamily housing.

We are ready to assist investors. For questions about Commercial Real Estate for sale and Commercial Real Estate Listings contact your Los Angeles commercial real estate advisors at SVN Vanguard.

1. Jobs Report

Despite rising capital costs and renewed recession fears, the US economy added 372k jobs in June, according to the latest employment numbers from the Bureau of Labor Statistics.
Business Services led the way with 74k new payrolls in June. Management roles had the largest increase within the industry, with 12k jobs added in the month.
Leisure and hospitality had a strong month with 67k new jobs added in June. Food services and drinking places continued to grow, adding 41k of all Leisure and Hospitality job gains. According to the Federal Reserve’s most recent beige book release, most of the nation is reporting an increase in travel and recreational activity. Still, employment in Leisure and Hospitality remains down by 1.3 million or 7.8% since February 2020.
The unemployment rate remained unchanged at 3.6%, where it has sat for the past four months. The number of unemployed persons was also unchanged at 5.9 million.
The Labor Force participation was little changed at 62.2% and remains below the 63.4% registered at the labor market’s pre-pandemic peak in February 2020.

2. Inflation and Inflation Expectations

The Consumer Price Index (CPI) rose 9.1% year-over-year through June according to the Bureau of Labor Statistics, another four-decade-plus high for the popular inflation gauge.
Core-CPI inflation, which excludes food and energy prices and is more consequential for policymakers, appears to have peaked at 6.5% in March and has nicked down in each successive month since. Nonetheless, the continued pressure on food and energy prices continues to be a significant concern for policymakers and forecasters.
The energy sub-index of CPI rose 7.5% in just the past month and accounted for almost half of overall price increases in June.
Inflation-adjusted or “real” incomes reduced by 1% in June and are down 3.6% from one year ago, according to data from both the CPI and Jobs reports.

3. Beige Book

Several of the twelve Federal Reserve districts reported growing signs of slowing demand, with at least five districts concerned about an increased risk of a recession, according to Fed’s July 13th Beige Book release.
Overall economic activity has been expansive since mid-May, but most districts reported a moderation in consumer spending as higher food and gasoline prices soaked up households’ discretionary income.
Auto sales remained sluggish, largely due to low inventory rather than slowing demand. Meanwhile, manufacturing activity was mixed, with several districts reporting that supply chain and labor issues
continued to slow down production.
Hospitality and tourism activity remains strong, with several districts reporting an uptick in group travel.
Housing demand continues to noticeably weaken. Growing concerns about affordability is believed to have contributed to non-seasonal declines in sales, causing inventory to climb and prices to moderate.
Commercial Real Estate conditions also slowed, while overall loan demand was mixed across most districts. Demand for consumer credit lines has grown while residential loan demand has weakened in the face of higher interest rates.

4. NMHC Construction Survey

Developers reported continued permit delays, materials price increases, and labor market tightness, according to the latest Quarterly Construction Survey conducted by NMHC in early June.
97% of respondents reported permitting delays—though the backlog has been consistent through the pandemic and is evident of similar labor and resource shortages being felt by state and local governments.
83% of respondents report that they have had to re-price deals over the past three months. Repricing has improved since March—the average project in June was repriced up by 11% compared to 25% three months ago.
Developers reported a 5% decline in lumber prices over the past three months, a reversal from the
previous quarterly survey.
Labor shortages are impacting over half of apartment developers. 53% report increased labor costs over expected levels within the last three months. 50% report that labor availability has remained the same compared to three months ago, while 40% report that availability has worsened.

5. CMBS Delinquencies

The CMBS delinquency rate posted a small but unexpected uptick in June, climbing 6 bps and landing at 3.2%, according to data by Trepp. The uptick was only the second over the past two years, with the last increase occurring in late 2021.
Each of the major property sectors saw a slight increase in delinquencies last month, with 0.18% of all loans now in the 30 days delinquent bucket— up five bps from May. The percentage of loans with special services fell to 4.91, a decline of 21 bps from May.
By sector, Industrial remained on the most solid footing (0.23%) but saw delinquencies climb by 11 bps month-over-month in June. Multifamily (1.04%) is up 2 bps from May. Office (1.28%) rose 5 bps. Lodging (5.08%) is up 6 bps from May while Retail (5.69%) is up 14 bps.

6. Gas Prices

Wholesale gasoline futures are falling, with unfinished gas, commonly referred to as “RBOB” down roughly 20% since its June 9th high. Prices at the pump often follow RBOB prices.
The average price per gallon at the pump stood at $4.63, down 15 cents from the week prior and down 38% over four weeks, according to AAA. Gasoline prices have now declined for 28 days straight.
According to an analysis by the NY Times, energy analysts say that Americans are spending in total $140 million less per day at the pump than they were one month ago.
Despite a massive, 11.2% month-over-month increase for the all-gasoline sub-index of CPI in June, fuel oil posted a -1.2% month-over-month decline over the same period.

7. Office Demand

New Office demand ticked up in May, according to the VTS Office Demand Index (VODI).
Office demand has essentially plateaued since March, falling into what appears to be a new post-pandemic equilibrium. However, VODI is up 21.8% quarter-over-quarter as the office market has shaken off the temporary headwinds induced by the omicron wave. VODI is down 14.1% year-over-year.
On a metro level, many metros showed slight recoveries in May but remain below their post-vaccine peak. New York City saw a notable increase of 12.7% month-over-month in May and 31.1% quarter-over-quarter. However, the Big Apple remains 16.7% below its post-vaccine peak in Fall 2021.
Other metros that saw Office demand climb were San Francisco (+2%), Boston (+3%), and Seattle (+9%). Declines were seen in Chicago (-14%), Washington D.C. (-2%), and Los Angeles (-1%).

8. GDPNow Predicts Recession

A growing number of analysts, institutions, and key indicators are increasingly signaling signs of a recession, and the Atlanta Federal Reserve’s GDPNow index just became the latest metric to flash a
warning sign.
According to the latest GDPNow update (July 8th), seasonally adjusted real GDP growth is expected to
register an annualized -1.2% decline in Q2 2022.
While the GDPNow forecast finished the week stronger than it had started, the predictions add to the grey cloud hovering above markets. Following Friday’s jobs data and wholesale trade reports from the BLS and Census Bureau, respectively, GDPNow revised up real personal consumption expenditures from 1.3% to 1.9% annualized, and private investment was revised up from -14.9% to -13.7%, annualized.

9. The Hot Market for Cold Storage

Cold Storage, which saw an influx of interest during the pandemic as increased demand for food delivery, groceries, and vaccine distribution poured money into those assets, faces an uncertain future as we move into the post-pandemic phase.
Overall, high demand remains, with the average vacancy rate standing at 3.5% for Cold Storage properties according to an analysis by Wealth Management.com. Cold Storage is seeing lower vacancy rates than overall traditional warehouse space.
High population, a large volume of agricultural imports, proximity to large ports, and limited space for cold storage are thought to be the key factors aiding asset pricing. Jacksonville, Detroit, and South New Jersey stand out as examples of where this is taking place, according to the analysis.
Historically, Cold Storage has been dominated by a handful of specialized REITs, but in recent years, the sector has attracted interest from private equity and institutional capital.

10. Apartment Development Risks

While apartment demand remains strong in the face of growing economic uncertainty, the industry should remain on the lookout for oversupply risks, according to an analysis by Apartments.com and CoStar.
Multifamily construction stands at its highest level in 40 years with over 842k units currently in development. Recent trends largely reflect an attempt to catch supply up to soaring apartment demand,
which has been responsible for some of the fastest residential rent growth on record.
However, the analysis looked at metros that fall into three categories: Markets with the greatest rise in apartment vacancies over the past year; markets that have experienced the steepest rent growth
declines over the past year; and current supply levels compared to the previous three-year average.
The analysis found that Phoenix, Tampa, and Austin could be candidates for potential overbuilding using the three metrics, as both Phoenix and Tampa fall in the top 10 for all three categories, while Austin does for two categories and registers at #11 in a third. Raleigh and Las Vegas, while considered as high-risk as the previous three, came in close behind.

SUMMARY OF SOURCES

(1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20220615a.htm
(2) https://www.bls.gov/news.release/cpi.nr0.htm
(3) https://www.federalreserve.gov/monetarypolicy/beigebook202207.htm
(4) https://www.nmhc.org/research-insight/nmhc-construction-survey/quarterly-survey-ofapartment-construction-development-activity-june-2022/
(5) https://www.trepp.com/trepptalk/monthly-snapshot-cre-structured-finance-banking-activityin-june-as-first-half-of-2022-concludes
(6) https://gasprices.aaa.com/
(7) https://www.vts.com/vts-office-demand-index-may-2022
(8) https://www.atlantafed.org/cqer/research/gdpnow
(9) https://www.wealthmanagement.com/industrial/consumers-take-step-back-home-deliverieswill-cold-storage-remain-hot-asset-type
(10) https://www.globest.com/2022/07/06/the-apartment-markets-at-greatest-risk-foroversupply/COMMERCIAL

1. CONSUMER PRICE INDEX

Consumer prices rose 8.6% year-over-year through May, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). May’s reading brings inflation back up to its forty-year high last reached in March, reversing what appeared to be declining price pressures in April.
Prices rose 1.0% month-over-month, jumping from a more modest 0.3% monthly growth rate the month prior. If prices grew at this rate over the course of one year, the annual inflation rate would reach 12.3%.
Core CPI, which excludes food and energy prices, again accelerated on a month-over-month basis, rising from 0.56% in April to 0.63% in May.
Energy prices continued their climb in May after moderating slightly in April. Month-over-month, energy prices are up 3.9%. Measured year-over-year, energy prices are up by 34.4% — the worst reading since 2005.

2. CONSUMER SENTIMENT

According to the University of Michigan, preliminary results for consumer sentiment dipped to their all-time low in June, declining to an index reading of just 50.2. Measured month-over-month, the index is down 14.0%. Year-over-year, the index has fallen by an abysmal 41.3%.
June 2022’s preliminary consumer sentiment index reading is 21.6 index points off from where it sat in April 2020 and 50.8 index points off where it entered the pandemic in February 2020.
As noted by the University of Michigan researchers conducting the survey, half of the respondents spontaneously mentioned high gas prices during their interviews — up from 30% in May and 13% one year ago.
The median consumer surveyed expects gas prices to rise by 25 cents per gallon over the next year — more than doubling the median expectation in May and coming in as the second-highest reading since 2005.

3. LOGISTICS MANAGERS INDEX

The Logistics Managers’ Index (LMI), a diffusion index where above 50 signals expansion and below is contraction, declined for the second straight month in May to 67.1, its lowest reading since December 2020 and just two months after reaching an all-time high of 76.2 in March.
Transportation capacity grew significantly over the month, jumping to 64.7, the highest since October of 2019. This is helping ease supply pressures but is also causing utilization rates to fall, placing downward pressure on transportation prices. The growth rate for transportation prices decelerated from an index mark of 73.9 to 64.3.
Inventories remain high while warehouses enter their 21 consecutive months of falling capacity rates — mainly due to stalled shipping containers unable to undock goods because of an available space
shortage.

4. MBA MORTGAGE APPLICATIONS

According to the Mortgage Bankers Association’s (MBA) Market Composite Index, mortgage applications in the US saw further declines in the week ending on June 3rd, which fell 6.5% from the previous week, according to the Mortgage Bankers Association’s (MBA) Market Composite Index.
Rising mortgage rates alongside high buying prices appear to be steadily weakening demand. Mortgage applications have now fallen for four consecutive weeks and have only registered six week-over-week increases since the start of the year. The volume of both purchase and refinance applications sank this week.
The average contract rate on a 30-year mortgage rose to 5.4% from 5.33%.

5. WORKPLACE OCCUPANCY

Workplace occupancy fell by 1.7% during the week ending on June 1st to a rate of 41.2%, according to Kastle Data Systems’ Back to Work Barometer. Much of this was due to the Memorial Day holiday, but attendance has fallen for four consecutive weeks.
Of the top metros tracked, Chicago saw the steepest one-week change, falling by 2.7%. Followed by Austin (-2.4%) and Houston (-2.1%). No major metros tracked saw an increase in attendance from the week before.
Compared to other in-person activities impacted by the pandemic, office occupancy remains far behind 2019 levels. Dinner reservations via Open Table data have recovered to 86.6% of 2019 levels, while TSA checkpoints have recovered to 90.7% of 2019 levels.

6. TECH WORKERS AND REMOTE WORK

A study by Morning Consult of about 750 tech workers shows that about 48% say they are now fully remote, well above the 22% observed before the onset of the pandemic.
85% of tech workers say that they are either fully remote or are in a hybrid setup. Roughly 3 in 5 tech workers say they are not interested in returning to the office full time, while separate 2 in 5 are more open to in-person work.
Just a third of tech workers said they have “never” considered resigning — roughly in line with pre-covid trends.
Tech companies stood out both early in the pandemic as well as into the reopening period, largely embracing remote work policies, but many are seeking a more robust return to the office in 2022.

7. CONSTRUCTION SPENDING

US Construction spending rose by 0.2 percent month-over-month between March and April to a seasonally adjusted annual rate of $1.745 trillion. This followed a 0.3 percent jump in March but comes in 30 basis points below market expectations.
Private construction spending rose 0.5% in the month, fueled by increases in manufacturing spending (1.6%), single-family home construction (0.5%) and office infrastructure (0.1%). Spending on power (-1.5%) and commercial construction (-0.2%) fell during the month.
Construction spending has now fallen for three consecutive months and in four of the last five months.

8. YIELD CURVE AND PREDICTED GDP GROWTH

The yield curve (in this example, the spread between the 10-year and 3-month Treasury bill rates), a popular barometer for recession risk, saw its slope begin to normalize in May after a flattening in April, according to an analysis by the Cleveland Federal Reserve. A flattening or an inversion of the yield curve is often read as an increase in recession risk.
The Cleveland Fed’s Predicted GDP growth metric for the year was unchanged at 4.9%, while the probability of a recession within one year dropped 10 basis points to 2.6%.
The calculated metric uses past values of the yield curve slope and GDP growth to provide forecasts of future GDP growth recession probabilities. A number of banks and economist surveys have begun to warn in recent weeks of a heightened probability of a recession as the Fed hikes interest rates to try and cool inflation.

9. SPECIAL SERVICING RATES

The CMBS Special Servicing Rate, a barometer for levels of stress among borrowers, fell 18 basis points in May to 5.12%. The rate has fallen from a pandemic high of 8.65% just 12-months ago.
The lodging sector saw the largest month-over-month improvement, falling by 56 basis points to 8.42% in May. Both Retail and Multifamily fell 20 basis points over the month, but Retail continues to have the highest special servicing rates by sector at 10.86%, while Multifamily enjoys one of the lowest at 1.29%. Industrial fell by 7 basis points to 0.46% and remains the lowest distressed sector. Meanwhile, Office ticked up by 1 basis point in May to 3.36%.
The percentage of loans on the special servicer watchlist fell to 22.35%, its eighth consecutive monthly decline.

10. CMBS DELINQUENCIES

CMBS delinquencies fell 37 bps to 3.14% in May from the month before, according to Trepp. It was the biggest one-month decline since January. The delinquency rate has now fallen in 22 of the last 23 months.
The CMBS delinquency rate climbed as high as 10.32% during the thick of pandemic-related headwinds in June 2020. This was only 2 bps short of the all-time high rate of 10.34% reached in July 2012.
By sector, Retail delinquencies fell the most from last month, dropping 79 bps to 6.57% in May. Lodging dropped by 51 bps to 5.83% during the month. Multifamily delinquencies fell by 18 bps to 1.01%. The Industrial delinquency rate declined 13 bps to 0.38%, while Office fell just 8 bps to a rate of 1.83%.

SUMMARY OF SOURCES

(1) https://www.bls.gov/cpi/
(2) http://www.sca.isr.umich.edu
(3) https://www.the-lmi.com/
(4) https://www.mba.org/
(5) https://www.kastle.com/safety-wellness/getting-america-back-to-work/#workplace-barometer
(6) https://morningconsult.com/2022/05/31/tech-workers-survey-office-hybrid-remote-work/
(7) https://www.census.gov/construction/c30/c30index.html
(8) https://www.clevelandfed.org/en/our-research/indicators-and-data/yield-curve-and-gdp-growth/background-and-resources.aspx
(9) https://www.trepp.com/hubfs/Trepp%20CMBS%20Special%20Servicing%20Report%20May%202022.pdf?hsCtaTracking=66cab05f-96c0-43f6-be25-e715a6b765e0%7Cce07558c-1801-4b1d-8b92-a8aa565a47f2
(10) https://www.trepp.com/hubfs/Trepp%20Delinquency%20Report%20May%202022.pdf?hsCtaTracking=cd011a9d-0cd0-46bb-a0ed-006398f7148e%7Cdef0f2d1-7a5c-4bb7-a444-688182e66081
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1. CONSUMER PRICE INDEX

Consumer prices rose 8.3% year-over-year through April, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). April’s reading was the first reduction in annual inflation since August 2021, but price pressures remain near 40-year highs.
Prices rose just 0.3% month-over-month, a modest reduction from the monthly rates registered at the start of the year and the lowest 30-day increase since September. If prices grew at this rate over the course of one year, the annual inflation rate would sit at 4.1%.
Core CPI, which excludes food and energy prices, accelerated on a month-over-month basis, rising from 0.3% in March to 0.6% in April.
Energy prices moderated after facing significant pressures in March. The overall energy subcomponent of CPI fell by 2.7% month-over-month, down from an increase of 11.0% in March.

2. APRIL JOBS REPORT

Nonfarm payrolls increased by 428k in April, according to the Bureau of Labor Statistics. The unemployment rate held steady at 3.6%, while the number of unemployed persons remained virtually unchanged at 5.9 million.
Jobs in leisure and hospitality, the hardest-hit sector from the pandemic and one of the leading recovery categories, have slowed for five consecutive months. While continued gains are positive, the slowing of growth as COVID-related impacts wane may indicate a cyclical hiring peak for the sector.
Construction added just 2k jobs in April, down significantly from 20k in March and 54k in February. The slowdown is notable given that the sector typically sees a seasonal ramp-up of hiring in the Spring. Further, the slowdown may be indicative of the qualified labor shortage the sector has faced in recent months.

3. INTEREST RATES AND YIELD CURVES

At its May meeting, the Federal Reserve’s policy-setting committee raised interest rates by 50 basis points from a range of 0.25%-0.50% to a range of 0.75%-1.00%. The policy move was the first half-percentage point hike by the Fed since 2000, and it follows its initial quarter-percent point hike in March that began the tightening cycle.
While a Summary of Economic Projections was not released alongside the May policy meeting, forecasts tabulated by the Chicago Mercantile Exchange’s Fed Watch Tool show an average year-end projection of 2.75%-3.00% for the Federal Funds Rate.
Yields on the 10-year Treasury pulled back to 2.84% on Thursday, May 12th, as investors continue to run for safety in bond markets given recent selloffs in stocks and little relief from this week’s inflation data. The yield on the 30-year Treasury dropped 5 bps to 2.99%.

4. EY WORK REIMAGINED SURVEY

A new survey by Ernst & Young dives underneath the “Great Resignation” surface to detail employees’ motivations and shifting sentiments. Workplace flexibility was of particular focus, with 80% of employees indicating a desire to work from home at least two days per week and just 20% indicating a hesitance towards fully remote working.
Notably, workers with shorter commutes are more open to working in the office. For employees with less than a 30-minute commute, roughly 40% are comfortable with a full return to the office. This drops to 25% for employees with a commute of more than 60 minutes.
68% of employers say that turnover has increased in the past 12 months, while 43% of employees say they will likely leave their current employer within the next year — up from just 7% in the last year’s survey. Percentages are higher for Gen-Z and millennials compared to older generations.

5. COMMERCIAL AND MULTIFAMILY ORIGINATIONS

Originations for both Commercial and Multifamily mortgages rose by 72% in Q1 2022 compared to Q1 2021, according to recent data from the Mortgage Bankers Association.
Loan originations fell quarter-over-quarter from Q4 2021, falling 39% but remain in line with typical seasonality trends. MBA Vice President of Commercial Real Estate Research Jamie Woodwell says that the “strong momentum in commercial and multifamily borrowing and lending at the end of 2021 carried into the first quarter,” indicative of continued strong demand for certain property types, notably Industrial and Multifamily.
By property type, Hotel originations increased the most year-over-year, rising by 359%. Industrial increased by 145% year-over-year, while Retail climbed by 88%. Originations for Health Care properties rose by 81%, while Multifamily increased by 57%. Office dropped by 30% year-over-year. On a quarter-over-quarter basis, declines were widespread due to seasonal trends.

6. EVICTIONS

An ongoing weekly tracker by the Cleveland Fed that has tracked eviction filings throughout the pandemic finds that evictions are falling relative to 2019 levels, particularly in places that did not have blanket eviction bans in place over the past two years.
Between April 22nd and April 30th, the latest dates of data availability, in areas with no previous local eviction ban, evictions fell 8.6% below their 2019 comparative week benchmark.
Almost all eviction protections have been lifted since the start of the year, and the Fed data lends support to the idea that the risk of an “avalanche” of evictions was likely overstated. Still, evidence of rising stress has surfaced in recent weeks as emergency rental assistance continues to stall and dry up, and rising rents create affordability issues.
HUD recently announced that it would double the size of its eviction protection program, which helps tenants seek legal assistance during proceedings.

7. STOCK MARKET VOLATILITY

Beyond recent yield curve drama in bond markets, equity markets have experienced an uptick in volatility in recent weeks as the Federal Reserve policy changes alongside rising geopolitical risks unnerve markets.
CBOE’s Volatility Index, better known as the “VIX,” finished at 34.75 on Monday, May 9th, up from 21.16 one month earlier. The VIX typically experiences daily fluctuations but has been in a heightened state since late January, when warnings of an impending Russian invasion of Ukraine started to spook markets. Since the actual invasion has taken place, VIX has become more elevated and reacted to other uncertainty-inducing events, such as the COVID lockdowns in China and a shift in Fed policy.

8. NMHC APARTMENT SURVEY

The NMHC’s Market Tightness Index registered an observation of 60 in the second quarter of 2022 — remaining above 50 for the fifth consecutive quarter, reflecting a still tightening market. Still, the index has now come down for three straight quarters after reaching a high watermark of 96 in Q3 2021.
The Equity and Debt Financing Indicines dropped to 35 and 9, respectively, signaling an overall challenging capital raising environment amid rising interest rates and growing market volatility.
When asked about to what extent respondents are worried about rising inflation and interest rates, 42% reported being “very concerned,” while 55% were “somewhat concerned.” Only 3% reported being either “not at all concerned” or unsure.

9. NAIOP CRE SENTIMENT INDEX

NAIOP’s bi-annual CRE sentiment index remained above 50 in its April release, a sign that more favorable market conditions are expected over the next 12 months. At the same time, the index fell from 56 in its prior release (September 2021) to 53 in April, marking declining optimism.
In a shift from the September 2021 results, most respondents expect cap rates across CRE to rise this year, reflecting the impact of rising interest rates and inflation.
CRE professionals firmly believe that both construction materials costs and construction labor costs will rise appreciably this year.
While equity financing conditions remain slightly positive (index reading = 51), respondents are pessimistic about the availability of debt, as its index fell from 54 in September 2021 to 39 in April 2022.

10. NY FEDERAL RESERVE HOUSING SURVEY

According to the New York Federal Reserve’s SCE Housing Survey, renters are increasingly pessimistic about their ability to buy a home in the current market environment. Only 42% of renters in the 2022 survey think they will buy a home in the next three years — down 10 percentage points from 2021.
Contributing to the outlook are current perceptions of underwriting standards. 33.5% of renter respondents felt it would be very difficult to obtain a mortgage, while an additional 29.7% thought it would be somewhat difficult.
Only 20.5% of renter respondents felt it would be very or somewhat easy to obtain a mortgage — a decline of 5.5 percentage points from last year.

SUMMARY OF SOURCES

(1) https://www.bls.gov/news.release/cpi.nr0.htm
(2) https://www.bls.gov/news.release/empsit.nr0.htm
(3) https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf
https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
(3) https://www.cnbc.com/2022/05/12/us-bonds-treasury-yields-fall-following-hot-inflation-data.html
(4) https://www.ey.com/en_gl/workforce/work-reimagined-survey
(5) https://www.mba.org/news-and-research/newsroom/news/2022/05/12/commercial-multifamily-borrowing-jumped-72-percent-in-the-first-quarter-of-2022
(6) https://www.clevelandfed.org/en/newsroom-and-events/publications/community-development-briefs/db-20200902-data-updates-measuring-evictions-during-the-covid-19-crisis.aspx
(6) https://www.nbcnews.com/business/consumer/federal-eviction-protection-program-doubles-funding-rcna28005
(7) https://fred.stlouisfed.org/searchresults?st=vix
(8) https://www.nmhc.org/research-insight/quarterly-survey/2022/nmhc-quarterly-survey-of-apartment-conditions-april-2022/
(9) https://www.naiop.org/Research-and-Publications/Sentiment-Index
(10) https://www.newyorkfed.org/microeconomics/sce/housing#/renters_1COMMERCIAL