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Commercial Real Estate Economic Update 01.13.2023

Featured Topics

  • CPI Inflation

  • Inflation Expectations

  • U-Haul Moving Data

  • ATTOM 2023 State of Real Estate Investing

  • New Trends in Industrial Real Estate

  • SFIB Small Business Survey

  • Logistics Managers Index

  • FY 2023 Appropriations Bill

  • World Bank 2023 Global Growth Forecast

  • December Jobs ReportCommercial Real Estate

Economic Update 01.13.23 – (Download Full PDF)

1. CPI INFLATION

• The Consumer Price Index (CPI) rose 6.5% year-over-year and just 0.1% month-over-month, according to the latest numbers from the Bureau of Labor Statistics — relatively in line with most industry estimates. The annual inflation rate has now fallen for six consecutive months.

• Core CPI, which removes food and energy prices from the calculation and is more closely tied to monetary policy decisions, rose 5.7% over the past 12 months and 0.3% between November and December.

• Gasoline led all price declines, dropping -9.4% month-over-month and -1.5% year-over-year. Used cars and trucks also saw significant cooling, falling -2.5% month-over-month and -8.8% year-over-year.

• Food and shelter costs continue to rise, with the former appearing to decelerate from 2022 price pressures. The food index has risen 10.4% year-over-year, but after reaching a 1.1% monthly increase in July 2022, food costs inflation has steadily slowed, registering a 0.3% increase in December.

• Stocks rose following the news, as markets hope these data signal a peaking of US inflation and a potential upcoming slowdown in the Fed’s interest rate hikes.

2. INFLATION EXPECTATIONS

• Results from the New York Fed’s latest Survey of Consumer Expectations, taken in December, show consumers are growing more optimistic about the inflation outlook. Respondents expect one-year inflation to grow at 5.0% in the 12 months ahead, down 0.2% from the November survey and the lowest survey result since July 2021.

• Economists view consumer expectations as essential in actual inflation’s outcome, as they influence consumer behavior that may self-fulfill the economic effect they predict. The New York Fed’s meter reached a record high of 6.8% in June 2022 amid a 40-year high in inflation.

• Consumers expect gas prices to rise 4.1% over the next 12 months while projecting food prices will grow 7.6% over the same period. Projections for both figures declined month-over-month.

• Longer-term inflation expectations were little changed.

3. U-HAUL MOVING DATA

• End-of-year transaction data from U-Haul showed a continuation of migration towards the southeast and southwest United States in 2022 — a continuation of trends that were present before but accelerated during the pandemic.

• U-Haul’s index calculates its rankings based on a net gain of one-way truck arrivals in each state or city. Texas ranked #1 for the second year in a row and the fifth time since 2016. Florida ranked second — its seventh consecutive year in the top 3. South Carolina was ranked 3rd.

• California and Illinois ranked the lowest on the index for the third consecutive year. In addition to New York, California and Illinois ranked the highest in truck demand, as more people leave areas on the west coast, midwest, and northeast.

4. ATTOM 2023 STATE OF REAL ESTATE       INVESTING

• In their look-ahead report for 2023, ATTOM signals caution in specific sectors while taking note of the shifting strategies taking place among investors that are leading to new opportunities.

• Focusing on “fix-and-flip” investors, the report notes that as higher financing, labor, and material costs cause these investors’ profit margins to compress, some are shifting to wholesales of properties to rental property buyers or a shift to “fix-and-hold” until market conditions improve.

• The report notes that as consumers enter their own holding pattern, opting to rent instead of buy as home prices and mortgage rates strain affordability, shifting to “fix-and-hold” strategies is likely a sensible approach.

• ATTOM also projects foreclosures to remain below pre-pandemic levels throughout most of 2023, preventing an influx of distressed properties from hitting the market and pushing downward on prices.

5. NEW TRENDS IN INDUSTRIAL REAL ESTATE

• Breaking down Industrial’s newest trends, Moody’s recently analyzed data showing a shift from location-centric to labor-centric capital spending.

• The analysis notes that as labor market tightness and inflationary pressures hold, it is becoming increasingly crucial for warehouse and distribution properties to be near qualified labor.

• Furthermore, prospective tenants of Industrial properties are also becoming more concerned about the physical makeup of the property, reflecting the higher-implied cost of employee retention. Moody’s suggests that at current wage rates for warehouse and distribution jobs, employees generally tolerate a 20-minute commute time before there is a greater demand for pay and benefits. To balance this trade-off, firms seek spaces large enough to accommodate added amenities for workers, including outdoor spaces for breaks.

• Of course, location still matters outside of the context of labor. Proximity to population centers remains among firms’ most critical factors when seeking new space. Other key factors include ceiling height, power supply, and buildings that account for ESG concerns.

6. NFIB SMALL BUSINESS SURVEY

• The National Federation of Independent Businesses Small Business Optimism Index declined 2.1 points in December to 89.8. its twelfth consecutive month below the index’s 49-year average (88).

• A net negative 51% of owners expect business conditions to improve over the next six months. Future expectations have now fallen consecutively since January.

• 32% of respondents report inflation as their more pressing issue for operating their businesses, with a 68% share of that group reporting input costs as the main culprit compared to the 34% who say labor costs as more pressing. Still, the net percent of owners who raised average product prices fell by 8 points in December to a net 43% (seasonally adjusted), the lowest since May 2021.

• 55% of small firms reported capital outlays in the previous six months, unchanged from the previous one. Within those who’ve spent capital in the past six months, just 11% improved or expanded facilities, down 1 point from November, while just 4% acquired new buildings or land for expansion, also down 1 point from November.

7. LOGISTICS MANAGERS INDEX

• The Logistics Managers’ Index (LMI), a diffusion index where above 50 signals expansion and below is contraction, increased to 54.6 in December, up from 53.6 the month before, which had been the second-lowest reading on record. The uptick was in-line with the typical holiday season that necessitates expansion in the space by many retailers.

• Inventory levels are increasing (57.3), but at a slower rate than much of 2022. Inventory was higher for downstream firms (62.8) than upstream firms (53.3) in December, with the former holding more stock in warehousing in preparation for the holiday season.

• Transportation capacity fell in December to an index reading of 48.1, its first contraction since April 2020. Meanwhile, transportation prices fell to a reading of 36.9, representing the sharpest rate of contraction on record.

8. FY 2023 APPROPRIATIONS BILL

• At the end of 2022, Congress successfully passed its fiscal year 2023 spending bill, which included, among others, several provisions that may impact commercial real estate development.

• While absent of significant tax implications, the bill includes a 10.6% increase in funding for the Department of Housing and Urban Development, with much of the increase funding additional tenant-based rental assistance in the form of housing assistance and housing choice vouchers.

• The bill also provides funding to cover the renewal of all existing contracts utilizing its Project-Based Rental Assistance program and a massive 24.2% increase in the Community Development Fund (CDF).

• Within CDF funding includes $85 million for a new program, “Yes In My Back Yard,” which incentivizes housing development by reducing exclusionary policies, including zoning and density restrictions.

9. WORLD BANK 2023 GLOBAL GROWTH FORECAST

• Global growth is expected to fall to its third-weakest pace in nearly three decades, dwarfed only by the 2009 (Great Financial Crisis) and 2020 (Covid-19 Pandemic) global recessions, according to the World Bank.

• Weakness within the three major centers of global growth — The US, the Euro area, and China — is expected to spread into major economies as foreign investment and import growth from those nations stall.

• Moreover, monetary policy tightening in advanced economies alongside a strong US dollar has led to large capital outflows from developing nations. The World Bank expects the US Federal Reserve’s aggressive tightening to sharply slow domestic growth.

• According to the report, US consumers have enjoyed a 5% decline in brent crude oil prices between February and November 2022; however, due to the continued weakening of foreign currencies relative to the US dollar, brent crude has risen 7% in domestic currency terms, on average, in all other advanced economies.

• Global energy prices are expected to ease in 2023, with most of the new oil supply originating from US suppliers as Russia faces continued sanctions and OPEC+ remains subject to their multilateral production agreement.

10. DECEMBER JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 223,000 jobs in December while the unemployment rate declined slightly to 3.5%.

• In 2022, leisure and hospitality occupations, the most impacted by the pandemic, were added at an average of 79,000 per month, significantly lower than 2021’s average of 196,000 per month. Employment in the industry remains 5.5% below pre-pandemic levels.

• Healthcare employment increased by 55,000 in December, construction employment increased by 28,000, and social assistance added 20,000 jobs in December.

• Employment in retail, manufacturing, professional and business services, government, and transportation/ warehousing were little changed.

• Average hourly earnings for all private nonfarm payroll employees rose 0.3% month-over-month. Over the past 12 months, average hourly earnings have increased by 4.6%.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm

• (2) https://www.newyorkfed.org/microeconomics/sce#/

• (3) https://www.uhaul.com/Articles/About/U-Haul-Growth-States-Of-2022-Texas-Florida-Top-ListAgain-28337/

• (4) https://www.housingwire.com/articles/2023-real-estate-investing-approach-with-caution/

• (5) https://cre.moodysanalytics.com/insights/cre-trends/from-location-to-labor-industrials-newesttrends/

• (6) https://www.nfib.com/surveys/small-business-economic-trends/

• (7) https://www.the-lmi.com/

• (8) https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf

• (9) https://www.worldbank.org/en/publication/global-economic-prospects

• (10) https://www.bls.gov/news.release/empsit.nr0.htm

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

View More Economic Updates:

Economic Update 01.13.23

Economic Update 12.30.22

Economic Update 12.16.22

Economic Update 11.4.22

Economic Update 10.28.22

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 12.30.22

Featured Topics

  • Q3 GDP & Consumer Spending Revised Up

  • CRE Debt Climbs

  • Local Governments and ARPA Spending

  • Prologis 2023 Supply Chain Forecast

  • Commercial Real Estate Prices

  • Home Prices

  • Independent Landlord Rental Performance

  • Pending Home Sales

  • PCE Inflation

  • VTS Office demand

Commercial Real Estate Economic Update 11.18.22 – (Download Full PDF)

 

1. Q3 GDP & CONSUMER SPENDING REVISED UP

• The Bureau of Economic Analysis reported an upward revision to Real GDP in the third quarter of 2022, mainly reflecting a revised total in U.S. consumer spending. The latest estimate shows a 3.2% annualized increase in Real GDP during Q3 2022, revised up from the previous estimate of 2.9% and a reversal from the 0.6% decline seen in Q2.

• Upward revisions occurred in consumer spending, nonresidential fixed investment, and state and local government spending. These revisions were partially offset by downward revisions seen in private inventory investment and exports.

• Both real incomes and spending are on the rise to close 2022. In November, personal income increased by $80.1 billion, or 0.4% annually, while personal consumption expenditures increased by $19.8 billion, or 0.1% annually.

• The spending-driven upward revision to growth is notable, given the ongoing analysis of the Federal Reserve’s interest rate policy, its impact on investment, and the debate around the potential for a U.S. recession. Outside of housing and other rate-sensitive products, consumers have largely shaken off the Fed’s rate hikes in their spending decisions. Historically, it is atypical for an economy to enter a recession while real incomes and spending are accelerating.

2. CRE DEBT CLIMBS

• According to a recent breakdown by Trepp, outstanding Commercial Real Estate debt increased by $474.2 billion during Q3 2022 to $5.52 trillion, a 9.3% increase year-over-year

• CMBS trusts and other securitization vehicles saw the largest relative increase through Q3 2022, climbing by 15.58% or $106.1 billion to a total of $786.9 billion outstanding. Banks and thrifts, which hold the largest volume of commercial mortgage debt, saw holdings rise by 10.4% year-over-year.

• Trepp estimates that a total of $447.42 billion of commercial mortgages will come due in 2023, with the bulk of them held by banks and thrifts.

• Multifamily loans outstanding rose by $170.8 billion last quarter, also a 9.3% increase year-over-year. Notably, the GSEs Fannie Mae and Freddie Mac only accounted for $106.1 billion. According to the analysis, the remainder of loan growth results from a rise in loans held by banks, thrifts, and life insurance companies alongside an increase in securitization vehicles’ inventory

3. LOCAL GOVERNMENTS AND ARPA SPENDING

• A recent report by Brookings analyses how municipalities have budgeted the $65 billion allocated to them through the American Rescue Plan Act (ARPA) funding. The first half of the funds were allocated to states and localities in May 2021, while the second half was allocated 12 months later in May 2022.

• The total share of committed State and Local Fiscal Recovery Funds (SLFRF) reached 51% by the end of March 2022, then climbed to 61% by the end of June, roughly one month after the second batch was received.

• Large cities and consolidated counties have allotted funding quicker, having budgeted roughly 70% of their SLFRF allocations compared to just 52% for counties.

• According to a review of Treasury Department data on ARPA allocations, 43% of city and county commitments were allocated to stabilizing government operations. Roughly 15% of funds have been budgeted for public health, though this decreased from 17% of the first batch. Community aid projects have increased from 9% of budgets after the initial half was allocated to 14% through June 2022. How recovery funds are allocated helps indicate where local government priorities lie.

4. PROLOGIS 2023 SUPPLY CHAIN FORECAST

• Prologis recently released a list of supply chain-related predictions that it was making for 2023, particularly anticipation of slowing warehouse development despite rapid rent growth.

• Prologis expects U.S. warehouse development starts to decline by up to 60% and reach a seven-year low, projecting south of 175 million square feet of development throughout the calendar year.

• Rising interest rates alongside stubborn prices for labor and materials are likely to constrain construction, while high demand amid low vacancy rates will likely continue to produce double-digit rent growth for the Industrial sub-sector, according to the report’s forecast. Prologis estimates that even if new warehouse demand were to fall to zero, the national vacancy rate would only increase by 260 basis points, creating a floor for rents.

5. COMMERCIAL REAL ESTATE PRICES

• Commercial real estate prices slowed in November to 4.9% year-over-year, the slowest annual pace for CRE prices in over two years, according to the latest national all-property index released by MSCI RCA. Prices fell 0.4% month-over-month.

• Industrial retains its top spot, with prices growing 14.4% year-over-year but well below the above 20% annual increases, the sector saw throughout most of this year. Industrial also charted the most significant monthly increase, climbing by 0.6%.

• The Apartment index saw the steepest fall on a monthly basis, dropping -1.1% month over month but rising 7.4% year-over-year. It was the first month that apartment price growth dipped below a double-digit rate since early 2021.

• The Retail index rose 7.1% year-over-year but just 0.1% month-over-month. The spread between the Retail and Apartment Indexes was at its narrowest since 2014.

• Office prices climbed 5.1% year-over-year through November, slowing from the 12.7% rate seen at the start of 2022. The CBD Office index rose 1.8% year-over-year, while Suburban Office rose 5.9%

• Price growth in Gateway markets recorded its slowest growth since 2010, climbing just 0.7 year-over-year. Further, the Gateway index has posted five consecutive monthly declines. Non-major markets rose 6.6% annually but declined 0.2% month-over-month.

6. HOME PRICES

• Home prices saw their fourth monthly decline through October 2022, according to the latest update to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. Home prices rose 7.3% year-to-date and 9.24% year-over-year.

• Miami (+21%), Tampa (+20.5%), and Charlotte (+15%) reported the highest year-over-year increases within the 20 cities tracked by the index. San Francisco performed the weakest (+0.6%), followed by Seattle (+4.5%).

• The report analysts note that despite significant regional differences, all 20 cities tracked in the index reflect the trend of short-term decline and medium-term deceleration. Analysts note that mortgage financing will continue to face headwinds as the Federal Reserve moves interest rates higher, which may continue to weaken price growth.

7. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time collection rate for independently operated residential properties fell by 156 bps between November and December, falling to 81.2%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics. December’s full payment rate is expected to land at 90.7% by month’s end.

• Units located in the Sun Belt have maintained higher on-time payment rates than units located elsewhere for the second consecutive month. December’s on-time payment rate stands at 81.7% in Sun Belt units and 80.9% in non-Sun Belt units.

• 2–4-unit rental properties and SFRs held the highest on-time payment rates of all sub-property types in December, both coming in at 82.3%.

8. PENDING HOME SALES

• Pending home sales dropped to their lowest level since April 2020 and their second-lowest level on record during November, according to the National Association of Realtors.

• Contract signings dropped by 4% to an index reading of 73.9, the lowest reading outside of the pandemic dating back to 2001. The decline exceeded most industry estimates.

• According to the University of Michigan’s Consumer Sentiment Index, U.S. consumers are the most pessimistic about homebuying conditions that they have been since the early 1980s.

• While Fed tightening continues to make credit more expensive for potential home-buyers, mortgage rates have actually declined in recent weeks. NAR Chief Economist Lawrence Yun anticipates that the modest rate decline should lead to moderate increases in homebuying activity

9. PCE INFLATION

• The PCE Price Index increased by 0.1% in November, a drop from the 0.4% increase in October and the slowest rise in price since July, according to the latest numbers from the Bureau of Economic Analysis. Prices are up 5.5% year-over-year

• Core PCE prices, which exclude the cost of food and energy and are the Fed’s preferred inflation gauge when considering monetary policy decisions, increased by 0.2% in November, below the 0.3% rise seen in October. Core prices also saw their slowest increase since July.

• Food prices rose 0.3% in the month, while energy prices dropped by 1.5%.

10. VTS OFFICE DEMAND

• The latest numbers from VTS’ Office Demand Index (VODI) showed an 8.3% increase in new demand for office space during October, the second consecutive month where office demand has increased, fully offsetting August’s declines.

• Much of October’s activity reflects seasonal patterns and comes amid increased economic uncertainty surrounding rising capital costs and the potential for a U.S. recession.

• The VODI remains 14.8% below its October 2021 level as the office sector converges towards a new post-pandemic normal.

• VTS finds that over the past year, new office space demand has strongly correlated with metro-area job postings, with the most notable increase in October seen in Washington D.C. while the most significant decrease tracked was in Seattle.

SUMMARY OF SOURCES

• (1) https://www.bea.gov/data/gdp/gross-domestic-product

• (2)https://www.trepp.com/trepptalk/commercial-mortgage-universe-grows-multifamily-universe-tops-2-trillion?utm_campaign=trepploan&utm_mediu

• (3) https://www.brookings.edu/blog/the-avenue/2022/12/16/local-governments-ramped-up-american-rescue-plan-commitments-and-expenditures-in-2022/

• (4) https://www.prologis.com/news-research/global-insights/seven-supply-chain-predictions-2023

• (5) https://www.msci.com/our-solutions/real-assets/real-capital-analytics

• (6) https://www.spglobal.com/spdji/en/documents/indexnews/

• (7) https://www.chandan.com/independent-landlord-rental-performance-report

• (8) https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales

• (9) https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=A%20

• (10) https://www.vts.com/

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

View More Economic Updates:

Economic Update 12.30.22

Economic Update 12.16.22

Economic Update 11.4.22

Economic Update 10.28.22

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 12.16.22

Featured Topics

  • FOMC Interest Rate Decision

  • CPI Inflation

  • Renter vs. Homeowner Inflation

  • Fannie and Freddie Unlikely To Meet Allocations

  • NAIOP Industrial Space Demand Forecast

  • The Short and Long-Run Effects of Remote Work

  • Jobs Report

  • Consumer Sentiment

  • Summary of Economic Projections

  • Brick-and-Mortar Retail Outlook

Commercial Real Estate Economic Update 12.16.22 – (Download Full PDF)

 

1. FOMC INTEREST RATE DECISION

• On December 14th, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 50 basis points to 4.25%-4.50%, slowing their speed of rate increases after four consecutive 75 basis point hikes — an apparent response to evidence of slowing inflation

• In their statement accompanying the FOMC meeting, members remained hawkish in their commitment to slowing the economy’s price pressures, largely refraining from any shift in tone compared to their last meeting, despite a deceleration in rate increases. Officials expect to continue increasing rates well into next year.

• Benchmark interest rates now sit at their highest level since 2007, with officials, on average, projecting a 5.1% terminal rate — the rate at which the committee stops increases — according to the FOMC’s latest dot plot.

2. CPI INFLATION

• The Consumer Price Index (CPI) rose 7.1% year-over-year and just 0.1% month-over-month, according to the latest numbers from the Bureau of Labor Statistics — below most industry estimates. The annual inflation rate has now fallen for five consecutive months.

• Core CPI, which removes food and energy prices from the calculation and is more closely tied to monetary policy decisions, rose 6.0% over the past 12 months and 0.2% between October and November

• Energy costs rose 13.1% year-over-year through November but contracted by -1.6% month-over-month. Food costs increased by 10.6% year-over-year and 0.5% month-over-month, the slowest monthly increase since December 2021.

3. RENTER VS. HOMEOWNER INFLATION

• According to Chandan Economics’ recalibrations of CPI data, the adjusted inflation rate for renters was 7.1% year-over-year in November, squarely in line with the increase in headline inflation while falling -0.7% from one month earlier

• Meanwhile, fixed-rate mortgage homeowners experienced a 4.8% year-over-year inflation rate through November and falling -0.8% month-over-month.

• The spread between renter and homeowner personal inflation rates reached 2.3% in November, a new record according to Chandan Economics’ calculations. In the six years between 2014 and 2020, the rate of renter inflation averaged 1.1 percentage points higher than homeowner inflation. Notably, the spread remained consistent over this period — never departing more than ten basis points from the 1.1 percentage point average.

4. FANNIE AND FREDDIE UNLIKELY TO MEET ALLOCATIONS

• Fannie Mae and Freddie Mac are on a trajectory to undershoot the $78 billion in Multifamily allocations granted to them by the FHFA, a potential first for the Government Sponsored Enterprises (GSEs).

• As explained by Yardi Matrix Research Director Paul Fiorilla, strong residential demand in recent years has meant high GSE lending capacity. Still, US inflation necessitated a rapid rise in interest rates, reducing some of this demand. Fiorilla forecasts a resulting $8 billion agency lending shortfall.

• Reflecting a fall in mortgage demand, FHFA recently cut the GSEs’ 2023 allocations to $75 billion, $3 billion below the 2022 level.

• Given the Agencies, and by extension, HUD’s role as a sort of lender of last resort, Fannie and Freddie’s lending capacity should remain solidly adequate to support the market’s credit needs. Further, half of all agency loans must be backed by properties that contain an affordable housing component, efforts which are likely to intensify as policymakers attempt to address a nationwide shortage of affordable housing.

5. NAIOP INDUSTRIAL SPACE DEMAND FORECAST

• According to NAIOP’s latest forecast, industrial space acquisition volume fell during the third quarter of 2022 as retailers and logistics firms reduced purchases amid easing supply chain issues, increased carrying costs, and slowing growth in the e-commerce sector.

• Amazon made headlines in the sector this year after nixing previously planned Industrial space expansions. At the same time, smaller e-commerce firms continued to lease new additional distribution spaces throughout the year, although at a lesser rate than in 2021.

• Net absorption in the sector nearly doubled in 2021 compared to the year before, registering 432.5 million square feet of absorption, beating NAIOP forecasts. The group forecasts that 326.3 million square feet will be absorbed by year-end 2022, amounting to a 24.5% decline from 2021 but 31.4% above 2020’s total.

• NAIOP notes that this year’s decline in acquisitions ran concurrently with decreases in the New York Fed’s Global Supply Chain Pressure Index, which has improved significantly from unprecedented highs.

 

6. THE SHORT AND LONG-RUN EFFECTS OF REMOTE WORK

• A recent paper sponsored by the Economic Innovation Group (EIG) studied the impact of remote work on long-term housing affordability. The report found that much of the new demand driven by remote work is shifting into markets where supply can respond to changes in demand more quickly, resulting in a longer-run decrease in housing costs for renters.

• The paper relies on research that has widely reported work-from-home’s dramatic impact on housing markets from 2020 to 2022, including increased overall demand, flattened “intra-city house price gradients,” and reallocated shares of demand among US cities. According to the report’s calculations, inflation-adjusted rents climbed by 8% while real house prices rose by over 20%.

• The report considers two main ways remote work impacts long-term demand trends. First, by marginally shifting away housing demand from the central business districts of large cities, which tend to experience less housing supply elasticity (tepid reactions to changes in demand). Secondly, through an overall increase in space demand as workers use home offices and increase their overall time spent at home, therefore increasing the demand for amenities.

7. JOBS REPORT

• The US economy added 263,000 jobs in November while the unemployment rate remained at 3.7%, according to the latest jobs report from the Bureau of Labor Statistics.

• What has developed into a pattern in recent months, payroll gains blew past most market expectations, climbing above the consensus estimate of 200,000.

• Notable gains were made in leisure and hospitality, health care, and government, with declines in retail trade and transportation/warehousing jobs. The trend is curious, given the winter month’s typical reduction in leisure demand alongside usual increases in retail store demand around the holidays.

• Average hourly earnings rose by 0.6% for the month and 5.1% year-over-year.

• Stocks fell following the news in anticipation of the Fed continuing its aggressive pace of rate hikes to slow consumption and, therefore, inflation. While the Fed ultimately slowed its rate hikes slightly to an increase of 50 basis points in December, officials remain committed to increases well into 2023 to calm price pressures.

8. CONSUMER SENTIMENT

• Consumer sentiment rose by 4% above November’s estimate in December, according to the latest numbers reported by the University of Michigan.• The agency will also require that 50% of the lending be mission-driven affordable housing, in line with last year’s levels. However, it has added a new workforce housing category that it hopes will incentivize conventional borrowers to maintain rents at affordable levels for “extended periods of time.”

• Each of the sentiment index’s components rose in December, with one-year business conditions expectations booming by 14% and views of long-term business conditions improving by 6%.

• The increase in sentiment was evident across several demographic groups, with a higher increase observed for high-income households and those with more significant stock holdings.

• Concerns over high prices slightly declined in the month’s survey. Year-end inflation expectations improved but remained elevated compared to historical standards, falling from 4.9% to 4.6%, a 15-month low.

9. SUMMARY OF ECONOMIC PROJECTIONS

• The Fed’s latest summary of economic projections, released alongside the December policy meetings, shows a higher forecast for 2022 year-end GDP growth compared to the September projection, but a much lower forecast for 2023. Members see growth slowing to 0.5% annually in 2023 compared to the September forecast of 1.2%. Longer-run growth forecasts were little changed.

• The average forecast for the unemployment rate was revised downward for year-end 2022, from 3.8% in September to 3.7% in December. Their 2023 forecast moved the projected unemployment rate slightly higher, from a forecast of 4.4% in September to 4.6%.

• Both headline and core inflation saw increases in their updated 2022 and 2023 forecasts despite a recent decline in consumer prices. Members expect a core-PCE inflation rate (the Fed’s preferred measure for monetary policy decisions) of 4.8% in 2022 and 3.5% in 2023.

10. BRICK-AND-MORTAR RETAIL OUTLOOK

• A recent Moodys report on Brick-and-Mortar Retail details its evolution in recent years as e-commerce becomes an increasingly dominant force in retail development. The analysis finds that developers are employing a new mix of property types, including housing, office, and both experiential and goods retail, that optimizes foot traffic and consistency

• While the report acknowledges that recent rent and vacancy trends show weakness, they also point to a degree of steadiness experienced by in-person retail in the face of pandemic-era stress. Retail vacancy has largely continued its post-GFC downward trend and has experienced little additional reduction from the COVID-19 pandemic.

• Further, e-commerce’s share of retail sales peaked in 2022 at 16.4% before normalizing as in-person activity rebounded in 2021 and 2022, falling to 14.5%.

 

SUMMARY OF SOURCES

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

View More Economic Updates:

Economic Update 12.16.22

Economic Update 11.4.22

Economic Update 10.28.22

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 11.18.22

Featured Topics

  • Thanksgiving Inflation

  • Inflation

  • ULI-PwC Emerging Trends In Real Estate

  • Retail Sales

  • Retail Inventories Excluding Autos

  • Grocery’s Ongoing Resilience

  • MSCI RCA Property Price Index

  • FHFA Multifamily Loan Purchase Caps

  • NAHB/Wells Fargo Housing Market Index (HMI)

  • Manufacturing Production

Commercial Real Estate Economic Update 11.18.22 – (Download Full PDF)

 

1. THANKSGIVING INFLATION

• As Americans sit down for this year’s Thanksgiving, it’s more than just after-dinner-waistlines experiencing uncomfortable inflation levels. According to a recent Chandan Economics analysis, the average price of turkey has increased a whopping 16.9% in the past year, more than doubling the current CPI rate of inflation (7.7%).

• Turkeys aren’t the only ones flying high this year. Compared to one year ago, potato prices are up an average of 15.2%. The other fresh vegetables at the table also see significant price pressures, albeit at a slightly more palatable 8.3%. Meanwhile, ham, another popular protein item, is up by 9.1% year-over-year.

• Other items noted in the report, such as flour and butter, are up this year by 24.6% and 26.7%, respectively. Meanwhile, egg prices are up by an odious 43.0%.

• If the above was sobering, a helpful caveat might be that this year, wine, beer, and spirits have all seen lower-than-average pricing pressures.

2. INFLATION

• According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 7.7% year-over-year through October and 0.4% month-over-month. Notably, between February 2021 and June 2022, monthly prices grew by at least 0.5% in 17 of the 21 months. Monthly inflation has been below 0.5% now for four consecutive months.

• Energy costs bounced back in October to become the largest major contributor to price pressures again, climbing 1.8% month-over-month following three consecutive declines.

• Food costs, while continuing to rise, decelerated to their most tepid increase since December 2021, rising just 0.6%. On the other hand, Shelter costs continued to accelerate in October, rising by 0.8%. Food and Shelter costs have risen by 10.9% and 6.9% over the past 12 months, respectively.

• Core CPI, which removes food and energy prices from the calculation, is up 6.3% over the last 12 months and 0.3% month-over-month. Core prices have decelerated slightly from summer levels but remain significantly above the Federal Reserve’s 2% target.

3. ULI-PxC EMERGING TRENDS IN REAL ESTATE

• Respondents in this year’s Emerging Trends in Real Estate by ULI-PwC appeared to agree that despite several uncertainties facing Commercial Real Estate in the year ahead, most remain optimistic about the industry’s long-term outlook.

• Among the key themes covered in the 2023 report was the workforce transformation enabled by remote work. By some estimates, in several major markets, less than half of all workers who have access to an office attend one on any given day. The report’s analysis estimates that 10-20% of Office stock may need to be repurposed as a consequence.

• Discussions about liquidity and capital markets were also a key theme in this year’s report, as sentiment has shifted from an “everyone wants in” headline to a more cautious and selective approach to capital deployment. Higher interest rates are not expected to trigger a sell-off in real estate assets, but investors are placing more weight on long-term fundamentals as capital availability shrinks.

• Infrastructure spending, which has been of focus in previous years’ reports, shifted from a relatively negative outlook to a positive one following Washington’s achievement of new legislation this year. An estimated $600 billion in new transportation funding and another $65 billion for broadband expansion, among other provisions, is seen as a critical investment, especially as several US metros experience generational growth.

• Housing affordability also remained on top of investors’ minds, as high financing costs and supply chain issues strain construction in a housing market already in short supply. While this may mean pain for many consumers in the short term, residential real estate investors are poised to benefit from demand trends that necessitate more capital in the space.

4. RETAIL SALES

• In October, US retail and food services sales saw their most significant single-month increase since February, climbing by 1.3% month over month to $694.5 billion following a flat performance in September.

• Motor vehicle dealer sales also rose 1.3% month-over-month through October, assisted by the easing of some supply chain issues. Sales at gas stations increased by 4.1%, primarily due to rising gasoline prices. Gas station sales are up 17.8% year-over-year.

• Excluding gasoline and autos, retail sales climbed a more modest 0.9% month-over-month but still outpaced recent monthly performance.

• Sales at food services and drinking places climbed by 1.6% month-over-month while volume at food and beverage storefronts rose by 1.4%. Non-store retailers rose 1.2%, furniture stores 1.1%, and building materials 1.1%.

5. RETAIL INVENTORIES EXCLUDING AUTOS

• US retail trade inventories, excluding autos and parts, dropped 0.1% month-over-month in October, the first negative reading for inventories since the middle of 2020.

• The news rings positive for retailers, many of who have cited excess merchandise as weighing down on profits in recent months. As the holiday shopping season approaches, many in the sector have begun sales campaigns earlier to both reduce inventories and adjust to post-pandemic spending patterns.

• On the other hand, high inventories have helped boom demand for Industrial space, which could see some softening activity as retail inventories decline. Nonetheless, the pandemic shift in online shopping and the overall resiliency of consumer spending should help reduce the exposure of Industrial assets to sudden changes in inventory.

6. GROCERY’S ONGOING RESILIENCE

• Despite falling activity compared to 2021, grocery stores have maintained most of their increased foot traffic relative to pre-pandemic levels, according to a recent analysis by Placer AI.

• Since June, year-over-year grocery store visits have been negative. Still, much of this is influenced by the elevated activity levels we saw in 2021 and the subsequent normalization of said activity. Grocery store visits have held above their pre-pandemic benchmark in three out of four months over the same period, signaling that the sector is maintaining its pandemic-era growth.

• The analysis notes that while overall visits have declined in recent months, visit duration has increased. The increase in duration also began in June, in line with when visits began dropping, suggesting that inflation pressures incentivize people to shop less, but purchase more in bulk.

7. MSCI RCA PROPERTY PRICE INDEX

• Commercial real estate prices rose 7.3% year-over-year through October, according to the latest national all-property index released by MSCI Real Capital Analytics (RCA). Prices declined 0.4% on a monthly basis.

• Price growth has eased in the face of rising financing costs and lower transaction activity. Transaction volume fell 21% year-over-year in the third quarter and saw another double-digit decline in October.

• Industrial retains its top spot, particularly standing out with a 0.7% month-over-month gain in prices, while annual growth hit 16.9%. Still, October was the seventh consecutive monthly deceleration for Industrial prices.

• Apartment prices fell 0.6% from September as slowing rent growth appears to have trickled into valuations. Apartment assets are still up 11.3% year-over-year, trailing only Industrial properties.

• Retail prices fell by 0.3% in October after being flat for two consecutive months but climbed 18.2% year over year.

• Office prices fell 0.1% month-over-month from September, but are up 5.2% year-over-year.

• Price growth in the six major gateway markets tracked by MSCI RCA continued to slow in October, falling by 0.8% month-over-month and climbing by just 0.8% year-over-year. Meanwhile, non-major metros were fl at from September to October but are up 9.9% year-over-year.

8. FHFA MULTIFAMILY LOAN PURCHASE CAPS

• The FHFA recently announced its 2023 multifamily loan purchase caps for Fannie and Freddie, which will total $75 billion each, down from $78 billion each in 2022. According to an agency statement, after the caps were announced, they reflect an “anticipated contraction of the multifamily originations market” in 2023.

• The agency will also require that 50% of the lending be mission-driven affordable housing, in line with last year’s levels. However, it has added a new workforce housing category that it hopes will incentivize conventional borrowers to maintain rents at affordable levels for “extended periods of time.”

• The FHFA also plans to allow loans to “finance energy or water efficiency improvements” for units affordable at or below 80% of area median income (AMI) classified as mission-driven. This level was 60% of AMI in 2022.

9. NAHB/WELLS FARGO HOUSING MARKET INDEX (HMI)

• According to this month’s preliminary estimate, the NAHB/Wells Fargo Housing Market Index (HMI) fell from 38 to 33 in November. All subcomponents of the index — current single-family home sales, projections of single-family home sales over the next six months, and current traffic of prospective buyers — posted month-over-month declines.

• Regionally, the West was the only of the four major regions to post an increase from October to November, rising from 25 to 28. The Midwest saw a modest decrease over the month by one index point, while the Northeast and South fell by 17 and 7, respectively.

• The HMI measures builder confidence on a scale of 0 to 100, calculated based on respondents rating their sentiment from “poor” to “good” and “low” to “very Low”. Confidence has now fallen for 11 consecutive months, returning to levels not seen since the early days of the COVID-19 pandemic.

10. MANUFACTURING PRODUCTION

• US manufacturing production rose by 2.4% year-over-year through October 2022, a decline from September following consecutive months of acceleration in August and September.

• The direction of production levels over the past couple of months provided hope that activity had bottomed out in July, but October was the smallest relative increase in production levels since January.

• The Federal Reserve tracks manufacturing production, considered to account for 78% of total economic production in the US, including major segments such as Chemicals (12%); food, drink, and tobacco (11%); machinery (6%); fabricated metal products (6%); computer and electronics (6%) and motor vehicles and parts (6%).

SUMMARY OF SOURCES

• (1) https://www.linkedin.com/posts/chandan-economics_chandan-economics-thanksgiving-inflation-activity-6999099751799353344-jQMA?utm_source=share&utm_medium=member_desktop

• (2)https://www.bls.gov/cpi/

• (3) https://www.pwc.com/

• (4) https://www.census.gov/retail/marts/www/marts_current.pdf

• (5) https://tradingeconomics.com/united-states/retail-inventories-ex-autos

• (6) https://go.placer.ai/library/brick-and-mortar-grocerys-ongoing-resilience?submissionGuid=34

• (7) https://www.msci.com/research-and-insights/market-insights

• (8) https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-2023-Multifamily-LoanPurchase-Caps-for-Fannie-Mae-and-Freddie-Mac.aspx

• (9) https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index

• (10)https://www.federalreserve.gov/releases/g17/current/default.htm

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

View More Economic Updates:

Economic Update 11.4.22

Economic Update 10.28.22

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 11.4.22

Featured Topics

  • Interest Rate Hike

  • Jobs Report

  • Multifamily Cap Rates

  • Malls In Recovery

  • Falling Rent Expectations

  • Fannie Mae Housing Forecast

  • Consumer Sentiment

  • Personal Income and PCE Inflation

  • New Construction

  • JOLTS

Commercial Real Estate Economic Update 11.4.22 – (Download Full PDF)

1. INTEREST RATE HIKE

• On November 2nd, the FOMC voted to increase the Federal Funds Rate by 75 bps for the fourth consecutive time, taking the benchmark interest rate to its highest since early 2008. The current Federal Funds Target Rate sits at 3.75%-4.00.

• In the accompanying statement following the meeting, the Fed shifted its tone slightly, indicating that it intends to “take into account the cumulative tightening of monetary policy” and “lags with which monetary policy affects economic activity and inflation.” The statement signals that while the committee remains committed to raising rates to rein in inflation, they are beginning to look for signs that may justify a pivot.

• Stocks initially rose on the news of the rate hike but began to fall during Jerome Powell’s news conference in reaction to the marginally more dovish statement on the future path of monetary policy.

• While a new summary of economic projections did not accompany this month’s meeting, Chair Powell stated in his press conference that he now expects the “terminal” rate — the level at which the Fed stops further rate increases — to be higher than what it was thought to be a few months ago. The higher rates need to be to tame inflation, the harder it will be for the central bank to achieve a monetary “soft landing.”

2. JOBS REPORT

• The US economy added 261,000 jobs in October while the unemployment rate rose slightly to 3.7%, according to the Bureau of Labor Statistics.

• This month’s jobs report performed stronger than most expectations and signaled a resilient labor market amid a tightening financial landscape. Notable gains were made in health care, professional and technical services, and manufacturing.

• Stock futures reacted positively to the report initially; however, the continued strength of job growth could force the Fed to continue the pace and degree of its monetary tightening campaign for longer.

• Healthcare employment climbed the most during the month (+55,000), followed by professional and technical services (+43,000), and manufacturing (+22,000). Employment in social assistance services, wholesale trade, and leisure and hospitality all saw notable growth in October.

• The average hourly earnings for all private employees rose by 0.4%, or 12 cents to $32.58.

3. MULTIFAMILY CAP RATES

• According to a recent analysis by Trepp, despite facing rising Treasury yields, multifamily cap rates are holding below 4%.

• The analysis uses an implied cap rate methodology, which examined the net operating incomes of transacted multifamily properties backed by a GSE-sponsored mortgage. While the report’s findings indicate that there has been some upward movement in cap rates between July and September, the increase has been a fraction of the observed rise in Treasury yields.

• Cap rates holding at their low levels while the 10-year Treasury yield has risen means that investors are receiving less risk compensation than they have at any point post-Financial Crisis.

4. MALLS IN RECOVERY

• David Simon, CEO of Simon Property Group, spoke to investors in his company’s third-quarter earnings call and talked about the improving conditions for their portfolio and the Mall sub-sector as a whole.

• For the country’s largest Mall REIT, occupancy rates were up 1.7 percentage points from a year ago, reaching just shy of 95%. Further, base minimum rent per square foot is also on the rise, gaining $0.89 in the past year to $54.80.

• According to daily pricing data from FTSE Nareit, no subsector in commercial real estate has enjoyed a more robust fourth quarter so far than Regional Malls. From the start of the quarter, Regional Mall REIT prices are up an average of 25.1%. The next best performing sub-sector was Lodging/Resorts at a distant 13.3%.

5. FALLING RENT EXPECTATIONS

• A new report by Yardi Matrix is warning that rent growth will likely slow significantly in 2022 and 2023.

• “Almost all of the expected rent growth for 2022 has happened,” the firm posits, and forecasts that rent growth may become “anemic.” While some of this is due to seasonality, as transaction activity and therefore rent growth naturally falls when the weather gets colder, Yardi’s revision also reflects an uncertain economic outlook in the medium term.

• Not all the analysis was negative, however. The firm notes that a mix of high inflation (including wages) and continued employment gains could result in a “higher-than-average jump out of the gate” in the spring when seasonality typically swings in the other direction.

6. FANNIE MAE HOUSING FORECAST

• Fannie Mae’s October 2022 housing forecast shows a slight contraction in home prices for 2023. The 1.5% decrease in home prices forecasted for 2023 would follow significant increases of 18.9% and 9.0% in 2021 and 2022 (forecasted), respectively.

• Fannie Mae’s forecasts expect elevated mortgage rates through the end of next year. The company is forecasting the 30-year fixed mortgage rate to average 6.7% in the fourth quarter of 2022 and a gradual decline from 6.6% to 6.2% between the first and fourth quarters of 2023. The 30-year mortgage averaged 3.0% in 2021.

• New multifamily construction is expected to stay strong through the end of 2022, averaging over 500 thousand units per quarter. It would be the second year of solid growth after starts increased by 21.8% in 2021. However, the forecasts call for starts to fall to an average of 390 thousand units per quarter. The drop would put multifamily housing starts back in line with benchmarks last seen in the years leading up to the pandemic.

7. CONSUMER SENTIMENT

• The University of Michigan Consumer Sentiment Index rose by 1.3 points in October from September, diverging from the Conference Board’s confidence index, which had shown a decline in October following increases in August and September.

• While recession concerns remain high, the Michigan index has risen in each month since hitting an all-time low in June. According to the report’s analysis, buying conditions for durables rose by 23% on the basis of easing prices and fewer supply chain issues. Still, future expectations for business conditions fell by 19%.

• The worsening of future consumer expectations alongside steady improvements in current sentiment is noteworthy — as one would typically expect current conditions to reflect consumers’ dim outlook gradually. This divergence reflects the uncertainty created by today’s dual inflationary and recessionary environment and the trouble that both businesses and consumers have forecasting ahead.

8. PERSONAL INCOME AND PCE INFLATION

• Both personal income and disposable personal income rose by 0.4% in September, while consumption increased by 0.6%, according to the latest figures by the Bureau of Economic Analysis (BEA).

• Recent increases in personal income have helped wages buck some of the impact of inflation in recent months, albeit modestly. Real personal disposable income has remained positive since June, when inflation last outpaced income gains.

• PCE Price Index increased by 0.3% month-over-month in September and 6.2% year-over-year. The PCE price index has relatively consistently underpaced the more widely cited Consumer Price Index, but both have moved in the same general direction.

• Core PCE prices, which exclude the cost of food and energy and are the Fed’s preferred inflation gauge when considering monetary policy decisions, increased by 0.5% in September and 5.1% year-over-year. Roughly over the past 3-4 months, core inflation has seen more upward pressure than headline prices, which could be a modest hand to households preparing for the winter months, some of who may need to prioritize food and energy spending over more discretionary items. Still, base effects from last year are partially responsible for decelerating headline prices, as food and energy prices started to outpace core more significantly beginning in the summer of 2021.

9. NEW CONSTRUCTION

• New construction continues to be delivered at a healthy pace through September 2022. The value of new construction put in place in September totaled $1.8 trillion at an annualized rate. The current speed is 0.2% higher than the previous month and 10.9% higher than in September 2021.

• Residential construction accounted for 51% of deliveries by total value, coming at $918 billion. Measured from one year ago, the annualized pace of single-family home deliveries is down by 2.7%, while the rate from multifamily is up by 1.9%.

• The annualized value of new office properties in place totaled $86 billion in September 2022, just 0.7% higher than last year. Meanwhile, commercial/retail properties, which saw their pace climb to $115 billion, were up by 22.4% from last year.

10. JOLTS

• Job openings remained strong through September 2022, signaling that the U.S. labor market exited third-quarter 2022 with momentum and resilience. Data from the Bureau of Labor Statistics Job Openings and Labor Turnover Survey show the number of job openings rose to 10.7 million in September — an increase from the 10.3 million in August. Though 10.7 million is down from the 11.9 million peak in March 2022, it remains well above the pre-pandemic peak of 7.6 million in November 2018.

• Accommodation and food services led the push in openings, which gained over 200 thousand openings between August and September 2022. Losses in the wholesale trade and finance and insurance sector tempered gains.

• September’s ratio of job openings to unemployed persons (1.9) underscores the nation’s tight labor market. The quits rate — the number of quits as a percent of total employment — stayed steady at 2.7% for the third consecutive month. The layoffs and discharges rates were little changed, showing employers were hanging on to talent through the end of the third quarter of 2022.

SUMMARY OF SOURCES

•(1)https://www.federalreserve.gov/newsevents/pressreleases/monetary20221102a.htm

• (2) https://www.bls.gov/news.release/empsit.nr0.htm

• (3) https://www.trepp.com/trepptalk/cap-rates-on-recent-sales-continue-to-hover-around-4-of-2021- noi

• (4) https://therealdeal.com/2022/11/01/simon-malls-dont-suck-in-fact-theyre-doing-well/

• (5) https://www.globest.com/2022/11/03/yardi-matrix-broadly-revises-multifamily-forecasts-down-for2022-and-2023/

• (7) http://www.sca.isr.umich.edu/

• (8) https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=A%20 measure%20of%20the%20prices,refl ecting%20changes%20in%20consumer%20behavior

• (9) https://www.census.gov/construction/c30/c30index.html

• (10) https://www.bls.gov/jlt/

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

View More Economic Updates:

Economic Update 10.28.22

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 10.28.22

Featured topics:

  1. GDP

  2. Beige Book Analysis

  3. MSCI RCA Commercial Property Prices

  4. Independent Landlord Rental Performance

  5. Industrial Sector Woes

  6. Student Housing

  7. Office Demand

  8. Existing Home Sales

  9. Subleasing Activity

  10. Consumer Confidence

1. GDP

• Real GDP increased by an annual rate of 2.6%% in Q3 2022, according to the advanced estimate released by the Bureau of Economic Analysis (BEA). The increase follows two consecutive quarterly declines in Q1 and Q2, moderating some concerns that the US economy is already in recession.

• Increases in exports, consumer spending, government spending, and nonresidential fixed investment drove the climb in economic output. Meanwhile, private inventory investment and residential fixed investment declined during the quarter.

• Notably, the only GDP components that changed directionality from last quarter were nonresidential fixed investment and government spending. Both went from a drag on GDP in Q2 to a driver of GDP in Q3.

• The leading driver of increased exports was industrial supplies and materials, including petroleum and other non-durables. Services also increased, mainly travel and financial services. Within consumer spending, an increase in healthcare expenditures was partially offset by a decline in motor vehicle and
food and beverage spending.

• Nonresidential fixed investment, which went from negative to positive quarter-over-quarter, was driven by equipment spending and intellectual property products while partially offset by a decrease in structures.

2. BEIGE BOOK ANALYSIS

• The mid-October release of the Federal Reserve’s Beige Book shows that economic activity expanded modestly across the nation compared to recent weeks. However, conditions varied greatly between industries and districts.

• Four of the twelve federal reserve districts reported flat activity while two noted declines—with the latter citing slowing or weak demand in the face of higher interest rates, inflation, and supply issues.

• Of the six that reported increased activity, travel and tourism rose sharply, while manufacturing activity held steady or expanded.

• Retail spending was reportedly flat across most districts as discretionary spending slowed while demand for services, specifi ally nonfinancial services, rose.
• Rising mortgage rates and elevated house prices continued to weaken single-family starts and sales but helped push up apartment leasing and rents.
• Commercial real estate experienced softening in both construction activity and sales as supply and labor shortages continue to slow activity, which higher borrowing costs have only exacerbated.

3. MSCI RCA COMMERCIAL PROPERTY PRICES

• Commercial real estate prices climbed by 11.1% year-over-year through September, according to the latest national all-property index released by MSCI RCA. This month’s increase was the weakest annual pace since early 2021.

• Price growth has eased in the face of rising financing costs and lower transaction activity. Transaction volume fell 21% year-over-year in the third quarter.

• Industrial retains its top spot, with prices growing 18.1% year-over-year, but saw growth dip below 20% for the first time in over a year.
• Apartments prices climbed 0.2% from August and registered a 15.9% increase year-over-year.

• Retail prices remained flat month-over-month but climbed 11.8% year-over-year through September from one year ago; still—annual growth in Retail has slowed for seven consecutive months.

• Office rates climbed 0.3% month-over-month from August and 6.8% year-over-year.

• Price growth in the six major gateway markets tracked by MSCI-RCA fell by 0.5% month-over-month and 3.7% year-over-year. Meanwhile, non-major metros climbed by 0.3% from August to September and 13.7% year-over-year.

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• On-time collection rates for independently operated residential properties improved by 159 bps between September and October, rising to 81.9%, reaching a 2022 high. According to Chandan Economics’ Independent Landlord Rental Performance Report.

• October’s full payment rate is forecast to land at 92.5% by month’s end, representing a year-over-year improvement of 171 bps.

• Observing the state of Florida following the impact of Hurricane Ian, the report shows that of the preliminary estimate, 82.2% of independently operated apartments in Florida have successfully paid their October 2022 rents on time. Notably, the on-time payment rate in Florida remains above the national
average by 24 bps, despite the storm’s impact.

• Gateway markets maintained higher on-time payment rates than units located elsewhere for the tenth consecutive month. October’s on-time payment rate stands at 82.0% in Gateway units and 81.9% in nonGateway units.

• Small Multifamily rental properties (5-49 units) held the highest on-time payment rate of all sub-property types in October, coming in at 83.2%.

• Mid-priced rentals ($2,000-$2,499) continue to outperform all other price points, recording an on-time payment rate of 85.8% through October 15th— the highest mark for these (or any) rentals in 2022 to date.

5. INDUSTRIAL SECTOR WOES

• Below-expectation earnings from Prologis for the third quarter rattled its share price this week and joined some other signals of relative concern in the Industrial market.

• Several indicators, including a decline in the Philadelphia Fed’s Capital Expenditures Index and transaction data from MSCI Real Capital Analytics, indicate a decrease in buying activity within the sector, and Prologis
acknowledges that some of their customers have publicly indicated their plans to pause Capex spending.

• However, Prologis CFO Tim Arndt states several customers have indicated “an overarching need to increase space as supply chain resiliency remains a top concern.”

• Vacancy rates remain at or near all-time lows in much of the country, sitting at just 1.7% in US coastal markets. As a result, space for new facilities has become increasingly scarce.

• According to statements by the company, although large customers like Amazon have slowed their buying pace, potentially due to overbuying in previous quarters, they have not given up on previously acquired space.

6. STUDENT HOUSING

• Occupancy in Student Housing stands at 96.6%, with assets seeing 4.1% year-over-year rent growth, according to the Fall 2022 Report Card by Yardi Matrix.
• The report card tracks housing units across 200 universities and found that preleasing had accelerated faster at schools with higher levels of selectivity and enrollment. Still, schools across the board saw an improvement in occupancy and incomes.

• 12 of 200 universities experienced double-digit growth in preleasing through September 2022 compared to one year before. Washington State University and the University of Houston topped the list, climbing by 18.9% and 16.4%, respectively.

• While enrollment nationwide remains below peak, the number of universities returning to full capacity climbed dramatically in the past year.

7. OFFICE DEMAND

• VTS’ latest office demand index (VODI) increased in September, joining several other metrics signaling an uptick in office activity following the Labor Day holiday.

• The VODI ticked up from an index reading of 46 to 48 in September. The index level indicates the percentage of office demand relative to a pre-pandemic benchmark.

• Similarly, weekly data by Kastle Data systems shows that most office tenants have returned to the office at least part-time. However, overall daily activity remains down by half of 2019 levels.

• Notably, after sharp declines throughout the summer, New York City office activity has returned to 52% of pre-pandemic levels.

• The VODI remains down 23.3% quarter-over-quarter and 33.3% year-over-year, though the annual comparison is partially due to base effects from a post-vaccine office push in Mid-2021.

8. EXISTING HOME SALES

• Existing home sales fell by a seasonally adjusted -1.5% month-over-month, its eighth consecutive month of decline as rising interest rates slow homebuying demand.
• Three of the four major regions of the US saw monthly declines, while the West region saw transactions hold steady. First-time buyers accounted for 29% of all home sales in September, holding relatively steady from previous months.

• Despite the weaker number of total sales, more than 25% of homes are selling above their listing price due to “limited inventory,” according to NAR Chief Economist Lawrence Yun. The median sales price for an existing home rose to $384,800, up 8.4% from one year ago.

• Utilizing data from Realtor.com’s Market Trends Report, the metros with the largest increases in list price growth were Miami (+28.3%), Memphis (+27.3%), and Milwaukee (+27.0%). Phoenix registered the highest increase in the percentage of homes that had prices reduced compared to one year ago (+32.3%),
followed by Austin (+27.4%) and Las Vegas (+20.0%).

9. SUBLEASING ACTIVITY

• According to a recent analysis by Trepp, sublease availability has been growing in smaller US cities over the past many months. In light of declining needs for office space among some of the nation’s largest
employers, several have taken to subleasing to reduce their footprints and costs.

• Trepp’s analysis suggests an inverse relationship between subleasing activity and multifamily rent growth. Metro areas with high living costs, where many residents were lost during the pandemic, generally see higher rates of subleasing activity, notably Los Angeles and Minneapolis. Atlanta is a notable exception,
maintaining strong subleasing activity while having more robust multifamily growth relative to other large metros.

• Several fi rms in California, including Meta, Verizon, and 8×8, have or are implementing plans to sublease their office spaces. The trend also appears to be developing in the life sciences space, with Biogen subletting some 18,000 square feet of space in Cambridge, MA.

10. CONSUMER CONFIDENCE
• According to the latest release by the Conference Board, consumer confidence decreased in October following consecutive increases in August and September.

• The overall index fell from a reading of 107.8 in September to 102.5 in October, while the “present situation” sub-index, which attempts to reduce the respondents’ inclusion of future expectations, fell even sharper.

• According to the Conference Board’s analysis of the report, inflation concerns ticked up again in September after several months of gradual reduction. The trend is likely connected to the subsequent gasoline and food prices acceleration over the same period.

• Respondents’ vacation plans were also reduced, though interestingly, intentions to purchase a home, an automobile, and other high-priced items rose despite upward pressure on borrowing rates.

• The expectations index declined more modestly than the present situation index but remained close to a reading of 80, a level that the index associated with a recession signal.

 

SUMMARY OF SOURCES
• (1) https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimate• (2) https://www.federalreserve.gov/monetarypolicy/beigebook202209.htm
• (3) file:///Users/julynovember/Downloads/2210_RCACPPI_US.pdf
• (4) https://www.chandan.com/independentlandlordrentalreport
• (5) https://www.globest.com/2022/10/21/heres-what-prologis-really-thinks-about-the-industrial-sector/
• (6) https://www.yardi.com/blog/matrix/student-housing-earns-high-marks/34436.html
• (7) https://vts.drift.click/october-2022-vodi?utm_medium=email&utm_source=content&utm_
• (8) https://www.nar.realtor/newsroom/existing-home-sales-decreased-1-5-in-september
• (9) https://www.trepp.com/trepptalk/sublease-availability-growing-in-smaller-us-cities
• (10) https://www.conference-board.org/topics/consumer-confi dence

View More Economic Updates:

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 10.28.22

Featured topics:

  1. GDP

  2. Beige Book Analysis

  3. MSCI RCA Commercial Property Prices

  4. Independent Landlord Rental Performance

  5. Industrial Sector Woes

  6. Student Housing

  7. Office Demand

  8. Existing Home Sales

  9. Subleasing Activity

  10. Consumer Confidence

1. GDP

• Real GDP increased by an annual rate of 2.6%% in Q3 2022, according to the advanced estimate released by the Bureau of Economic Analysis (BEA). The increase follows two consecutive quarterly declines in Q1 and Q2, moderating some concerns that the US economy is already in recession.

• Increases in exports, consumer spending, government spending, and nonresidential fi xed investment drove the climb in economic output. Meanwhile, private inventory investment and residential fixed investment declined during the quarter.

• Notably, the only GDP components that changed directionality from last quarter were nonresidential fixed investment and government spending. Both went from a drag on GDP in Q2 to a driver of GDP in Q3.

• The leading driver of increased exports was industrial supplies and materials, including petroleum and other non-durables. Services also increased, mainly travel and financial services. Within consumer spending, an increase in healthcare expenditures was partially offset by a decline in motor vehicle and food and beverage spending.

• Nonresidential fixed investment, which went from negative to positive quarter-over-quarter, was driven by equipment spending and intellectual property products while partially offset by a decrease in structures.

2. BEIGE BOOK ANALYSIS

• The mid-October release of the Federal Reserve’s Beige Book shows that economic activity expanded modestly across the nation compared to recent weeks. However, conditions varied greatly between industries and districts.

• Four of the twelve federal reserve districts reported flat activity while two noted declines—with the latter citing slowing or weak demand in the face of higher interest rates, inflation, and supply issues.

• Of the six that reported increased activity, travel and tourism rose sharply, while manufacturing activity held steady or expanded.

• Retail spending was reportedly flat across most districts as discretionary spending slowed while demand for services, specifically nonfinancial services, rose.

• Rising mortgage rates and elevated house prices continued to weaken single-family starts and sales but helped push up apartment leasing and rents.

• Commercial real estate experienced softening in both construction activity and sales as supply and labor shortages continue to slow activity, which higher borrowing costs have only exacerbated.

3. MSCI RCA COMMERCIAL PROPERTY PRICES

• Commercial real estate prices climbed by 11.1% year-over-year through September, according to the latest national all-property index released by MSCI RCA. This month’s increase was the weakest annual pace since early 2021.

• Price growth has eased in the face of rising financing costs and lower transaction activity. Transaction volume fell 21% year-over-year in the third quarter.

• Industrial retains its top spot, with prices growing 18.1% year-over-year, but saw growth dip below 20% for the first time in over a year.

• Apartments prices climbed 0.2% from August and registered a 15.9% increase year-over-year.

• Retail prices remained flat month-over-month but climbed 11.8% year-over-year through September from one year ago; still—annual growth in Retail has slowed for seven consecutive months.

• Office rates climbed 0.3% month-over-month from August and 6.8% year-over-year.

• Price growth in the six major gateway markets tracked by MSCI-RCA fell by 0.5% month-over-month and 3.7% year-over-year. Meanwhile, non-major metros climbed by 0.3% from August to September and 13.7% year-over-year.

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• On-time collection rates for independently operated residential properties improved by 159 bps between September and October, rising to 81.9%, reaching a 2022 high. According to Chandan Economics’ Independent Landlord Rental Performance Report.

• October’s full payment rate is forecast to land at 92.5% by month’s end, representing a year-over-year improvement of 171 bps.

• Observing the state of Florida following the impact of Hurricane Ian, the report shows that of the preliminary estimate, 82.2% of independently operated apartments in Florida have successfully paid their October 2022 rents on time. Notably, the on-time payment rate in Florida remains above the national
average by 24 bps, despite the storm’s impact.

• Gateway markets maintained higher on-time payment rates than units located elsewhere for the tenth consecutive month. October’s on-time payment rate stands at 82.0% in Gateway units and 81.9% in non Gateway units.

• Small Multifamily rental properties (5-49 units) held the highest on-time payment rate of all sub-property types in October, coming in at 83.2%.

• Mid-priced rentals ($2,000-$2,499) continue to outperform all other price points, recording an on-time payment rate of 85.8% through October 15th— the highest mark for these (or any) rentals in 2022 to date.

5. INDUSTRIAL SECTOR WOES

• Below-expectation earnings from Prologis for the third quarter rattled its share price this week and joined some other signals of relative concern in the Industrial market.

• Several indicators, including a decline in the Philadelphia Fed’s Capital Expenditures Index and transaction data from MSCI Real Capital Analytics, indicate a decrease in buying activity within the sector, and Prologis
acknowledges that some of their customers have publicly indicated their plans to pause Capex spending.

• However, Prologis CFO Tim Arndt states several customers have indicated “an overarching need to increase space as supply chain resiliency remains a top concern.”

• Vacancy rates remain at or near all-time lows in much of the country, sitting at just 1.7% in US coastal markets. As a result, space for new facilities has become increasingly scarce.

• According to statements by the company, although large customers like Amazon have slowed their buying pace, potentially due to overbuying in previous quarters, they have not given up on previously
acquired space.

6. STUDENT HOUSING

• Occupancy in Student Housing stands at 96.6%, with assets seeing 4.1% year-over-year rent growth, according to the Fall 2022 Report Card by Yardi Matrix.

• The report card tracks housing units across 200 universities and found that preleasing had accelerated faster at schools with higher levels of selectivity and enrollment. Still, schools across the board saw an improvement in occupancy and incomes.

• 12 of 200 universities experienced double-digit growth in preleasing through September 2022 compared to one year before. Washington State University and the University of Houston topped the list, climbing by 18.9% and 16.4%, respectively.

• While enrollment nationwide remains below peak, the number of universities returning to full capacity climbed dramatically in the past year.

7. OFFICE DEMAND

• VTS’ latest office demand index (VODI) increased in September, joining several other metrics signaling an uptick in office activity following the Labor Day holiday.

• The VODI ticked up from an index reading of 46 to 48 in September. The index level indicates the percentage of office demand relative to a pre-pandemic benchmark.

• Similarly, weekly data by Kastle Data systems shows that most offi ce tenants have returned to the office at least part-time. However, overall daily activity remains down by half of 2019 levels.

• Notably, after sharp declines throughout the summer, New York City offi ce activity has returned to 52 of pre-pandemic levels.

• The VODI remains down 23.3% quarter-over-quarter and 33.3% year-over-year, though the annual comparison is partially due to base effects from a post-vaccine office push in Mid-2021.

8. EXISTING HOME SALES

• Existing home sales fell by a seasonally adjusted -1.5% month-over-month, its eighth consecutive month of decline as rising interest rates slow homebuying demand.

• Three of the four major regions of the US saw monthly declines, while the West region saw transactions hold steady. First-time buyers accounted for 29% of all home sales in September, holding relatively steady
from previous months.

• Despite the weaker number of total sales, more than 25% of homes are selling above their listing price due to “limited inventory,” according to NAR Chief Economist Lawrence Yun. The median sales price for an existing home rose to $384,800, up 8.4% from one year ago.

• Utilizing data from Realtor.com’s Market Trends Report, the metros with the largest increases in list price growth were Miami (+28.3%), Memphis (+27.3%), and Milwaukee (+27.0%). Phoenix registered the highest
increase in the percentage of homes that had prices reduced compared to one year ago (+32.3%), followed by Austin (+27.4%) and Las Vegas (+20.0%).

9. SUBLEASING ACTIVITY

• According to a recent analysis by Trepp, sublease availability has been growing in smaller US cities over the past many months. In light of declining needs for office space among some of the nation’s largest employers, several have taken to subleasing to reduce their footprints and costs.

• Trepp’s analysis suggests an inverse relationship between subleasing activity and multifamily rent growth. Metro areas with high living costs, where many residents were lost during the pandemic, generally see higher rates of subleasing activity, notably Los Angeles and Minneapolis. Atlanta is a notable exception,
maintaining strong subleasing activity while having more robust multifamily growth relative to other large metros.

• Several firms in California, including Meta, Verizon, and 8×8, have or are implementing plans to sublease their office spaces. The trend also appears to be developing in the life sciences space, with Biogen subletting some 18,000 square feet of space in Cambridge, MA.

10. CONSUMER CONFIDENCE

• According to the latest release by the Conference Board, consumer confidence decreased in October following consecutive increases in August and September.

• The overall index fell from a reading of 107.8 in September to 102.5 in October, while the “present situation” sub-index, which attempts to reduce the respondents’ inclusion of future expectations, fell even sharper.

• According to the Conference Board’s analysis of the report, infl ation concerns ticked up again in September after several months of gradual reduction. The trend is likely connected to the subsequent gasoline and
food prices acceleration over the same period.

• Respondents’ vacation plans were also reduced, though interestingly, intentions to purchase a home, an automobile, and other high-priced items rose despite upward pressure on borrowing rates.

• The expectations index declined more modestly than the present situation index but remained close to a reading of 80, a level that the index associated with a recession signal.

Commercial Real Estate Economic Update 9.30.22

Featured topics:

  1. Interest Rate Hike

  2. Summary of Economic Projections

  3. Life Sciences Drive Office Demand

  4. Median Apartment Rents Decline

  5. Return-To-Office

  6. Independent Landlord Rental Performance

  7. Remote Work and Housing Demand

  8. Labor Market Disengagements

  9. MSCI RCA Commercial Property Price Index

  10. Global Supply Chains

1. INTEREST RATE HIKE

• On September 21st, the FOMC voted to increase the Federal Funds Rate by 75 bps for third consecutive time to fight persistent US inflation. The current Federal Funds Target Rate sits at 3.00%-3.25%—its highest level since January 2008.

• Stocks reacted negatively to the news, with the Dow closing 1.7% lower than it started on Thursday, while the Nasdaq Composite fell 1.79%.

• In its summary of economic projections, the committee forecasted a half-percentage point rise in unemployment and an effective federal funds rate of 4.6% by the end of 2023.

• Notably, central banks across Asia and Europe followed suit on September 22nd with their own string of rate hikes, a signal that global monetary policy is coalescing to tackle what is a global phenomenon.

2. SUMMARY OF ECONOMIC PROJECTIONS

• The Federal Reserve’s latest summary of economic projections, released alongside the September policy meetings, reflected a consensus forecast of slowing growth, higher inflation, and a limited increase in unemployment by the end of 2022.

• The average forecast for the annual change in GDP through Q4 2022 fell to a dismal 0.2% in their September projection, a drop from the 1.7% growth forecast in June.

• The Fed also projects that, as a result of higher rates and slowing growth, the unemployment rate will rise to 3.8% by year’s end, but this is just ten bps above their June forecast.

• Both headline and core inflation are expected to remain above the FOMC’s 2.0% target as we turn the page to 2023. The median forecast for headline PCE was 5.4% in the September projections, up from a forecasted 4.2% in June, signaling that the Fed believes that more aggressive action is needed to fight inflation compared to what they thought was required just a few months ago. The median core-PCE projection, which removes food and energy costs, rose to 4.5% from 4.3% in June.

3. LIFE SCIENCES DRIVE OFFICE DEMAND

• CommercialEdge’s latest National Office Report, released in September 2022, shows that Life Sciences is increasingly driving office demand even as office vacancies continue to climb.

• 21.6 million square feet of lab space is currently in development nationally, with the largest projects in Boston, San Diego, and San Francisco. Moreover, the average Life Science facility sits at $645 per square foot, significantly above the average of $258 per square foot for general office buildings.

• Large projects planned in Boulder County, Colorado, and Phoenix also signal that the trend has stretched beyond the typical hubs for the sector and into more tertiary markets.

• According to BLS data, as of 2021, employment in life science related positions is highest in Boston (23,900), New York (18,100), and San Francisco (14,200), as defined by CommercialEdge’s scope of the industry.

4. MEDIAN APARTMENT RENTS DECLINE

• Property tracking by Zumper shows that the median apartment rent has decreased for the first time in almost two years, with more than half of the markets tracked by the firm showing month-over-month declines in the average one-bedroom rent.

• Zumper’s findings are supported by recent data from CoStar and RealPage, which show a ten bps decline in apartment asking rents nationally between July and August (CoStar) and a 0.4% increase in samestore asking rents for new leases between July and August (RealPage).

• Some large metros are bucking this trend; however, low supply in some markets amid high demand has limited the flexibility of rent prices. In Seattle, the median one-bedroom is $2,040, up 20.7% year-overyear and 2.0% month-over-month, according to RealPage. Rents in New York City also continue to reach new highs.

• Minneapolis, Nashville, Tampa, Orlando, Jacksonville, and El Paso saw declines in asking rents in August.

5. RETURN-TO-OFFICE

• Market watchers have long signaled that September would be a telling month for the health of the US office sector. With children returning to schools without the overhanging threat of possible shutdowns and prolonged periods of remote learning, employers are making bigger pushes to get workers back at their desks.

• According to Kastle System’s “Back to Work Barometer,” physical office occupancy across the 10 US cities averaged 47.5% of its pre-pandemic benchmark in the week of September 14th. While these data indicate that physical office occupancy remains less than hallway towards a full recovery, they nonetheless represent the highest occupancy rates since March 2020.

• Average office physical occupancy rates jumped by a sizable 4.1% across the top 10 markets, reflecting the impact of children starting their school year. New York saw the largest one-week increase, with occupancy rates rising by an encouraging 8.7%. Meanwhile, Austin holds the title as the most recovered office market to-date, with physical occupancy rates rising to 60.5% of their pre-pandemic benchmark.

6. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time collection rate for independently operated residential properties fell by 55 bps between August and September, landing at 81.1%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.

• Gateway markets have maintained higher on-time payment rates than units located elsewhere for nine consecutive months through July 2022, though the gap has been narrowing over the previous three months. The September on-time rate for Gateway markets stands at 82.3%, while non-gateway markets registered an on-time rate of 81.2%.

• Analyzing performance trends at different rental price points, units with monthly rents below $1,000 continue to register the lowest average on-time payment rate through September 2022, coming in at 79.6%. Mid-priced rental units perform the strongest, with a September on-time payment rate of 85.4%. High-priced rentals, defined as those charging more than $2,500 sit in the middle, with an on-time payment rate of 84.4% in September.

• 2-4 Family rentals maintained the highest on-time payment rate of all sub-property types for the sixth consecutive month, arriving at 83.2%.

7. REMOTE WORK AND HOUSING DEMAND

• A new paper by the San Francisco Fed analyzes the relationship between the uptick in remote work and housing demand and found that the shift to remote work may account for more than half of overall homeprice increases between November 2019 and November 2021.

• The share of work done from home, either full or hybrid, has stabilized around 30% as of August 2022, up from 5% in 2019 and 60% in Spring 2020. Still, levels differ significantly across metros, and data shows that cities with more remote work before the pandemic saw larger increases in remote work during the pandemic.

• Breaking cities down into tiers, based on their level of remote work, price growth was essentially uniform across all tiers before the pandemic. However, by late 2020, cities with a higher share of remote work saw significantly higher home price increases than those with less, with the divergence expanding in 2021.

8. LABOR MARKET DISENGAGEMENTS

• Despite rising economic headwinds and growing recessionary concerns, the US labor market remains exceptionally tight, with nearly two job openings available for every one person looking for work. A significant reason why demand for labor is outpacing supply is that less Americans are participating in the labor force. While the labor force participation rate has risen by 0.7 percentage points in the past year, it remains down by another 1.0 percentage points from where it entered the pandemic.

• A recent Chandan Economics analysis of the Census Bureau’s August 2022 Current Population Survey explored the reasons why out-of-work Americans are choosing not to look for jobs. According to the f indings, two factors are keeping a growing number of people out of the job market: family responsibilities and schooling/training.

• Family responsibilities was the primary reason why 18.8% of out-of-work Americans had not looked for new employment in recent weeks— up from just 12.1% in 2020. The uptick is likely due to a surge in family formations following the initial stages of the pandemic.

• Similarly, 15.1% gave the reason of attending school or enrolling in a training— up from 8.8% two years ago.

9. MSCI RCA COMMERCIAL PROPERTY PRICE INDEX

• Commercial real estate prices climbed by 14.0% year-over-year through August, according to the latest national all-property index released by MSCI RCA. This month’s increase was the slowest annual pace of 2022, while the index rose just 40 basis points month-over-month.

• Each of the four major sectors saw modest price growth deceleration in August. Industrial retains its top spot, with prices growing 24.7% year-over-year. Industrial also charted the most significant monthly increase, climbing by 1.5%.

• The Apartment index rose 17.1% year-over-year but experienced its sixth consecutive month of slowing growth. Apartment prices climbed by ten bps between July and August.

• The Retail index rose 16.0% year-over-year but, like Apartments, saw its sixth consecutive month of slowing growth. Retail prices are up 80 bps from July.

• Suburban Office posted a 6.6% year-over-year increase and saw its fourth consecutive month of slowing price growth. The CBD Office index rose 7.7% year-over-year and ten bps between July and August.

• Price growth in Gateway markets climbed 7.6% year-over-year while price growth in non-major metros rose by 16.3% year-over-year.

10. GLOBAL SUPPLY CHAINS

• According to the New York Federal Reserve’s Global Supply Chain Pressure Index, supply chain conditions have made significant progress towards normalization in recent months, though they are still far from pre-pandemic normality.

• Supply chain disruptions have proven a significant contributor to inflation both in the US and around the world over the past year, as consumer demand has exceeded the capacity of supply lines to keep up.

• The index has a historical average value of zero, with each monthly observation represented as standard deviation from the mean. August 2022’s index value was a 1.47. Before the pandemic, the index had never fallen below -1.57 or risen above 1.56, indicating that today’s conditions still reflect abnormally stressed supply chain conditions.

• Nonetheless, the index has improved considerably in 2022. After reaching an all-time high is December 2021 (4.31), the Supply Chain Pressure Index has fallen in six of the past eight months.

SUMMARY OF SOURCES

  1. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htm
  2. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220921.pdf
  3. https://www.commercialedge.com/blog/national-office-report/
  4. https://www.kastle.com/safety-wellness/getting-america-back-to-work/#workplace-barometer
  5. https://www.chandan.com/_files/ugd/df56fe_8cccce5ce9ac4b67851830309d9d1838.pdf
  6. https://www.msci.com/our-solutions/real-assets/real-capital-analytics
  7. https://www.newyorkfed.org/research/policy/gscpi#/overview
View More Economic Updates:

Economic Report 9.9.2022

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

2022 Mid-Year Market Report COMMERCIAL REAL ESTATE MID-YEAR UPDATE

Table of Contents:

Commercial Real Estate Property Prices

Apartment

Office

Retail

Industrial

Macro Economy

About SVN®

Commercial Real Estate Property Prices

Through July, measured by MSCI RCA’s Commercial Property Price Index (CPPI), commercial real estate prices have risen by 16.8% from one year ago. The latest figures are just a tad under the record 19.9% pace that was registered earlier this year and reflect an industry that continues to be a bright spot amid a storm of economic headwinds. Properties that are located both inside and outside of gateway metros have moderately slowed in recent months but have shown the ability absorb the early effects of monetary tightening, climbing by 8.9 % and 19.3% year-over-year, respectively, through July.

Growth in gateway markets have consistently trailed non-gateway metros throughout the pandemic recovery, as corporate America inched its way into a new normal within larger cities. Somewhat surprisingly, the divergence only intensified as the United States moved beyond COVID-era policies and activity restrictions.

The growth spread between non-gateway metros and the top six major metros was relatively unchanged between December 2020 and July 2021 but began to balloon as the Delta variant took hold in the Fall. As Delta subsided to start 2022, inflation in the US intensified, with non-major metros experiencing a higher degree of cost increases relative to larger cities. So-to did the growth spread between gateway and non-gateway metros, which swelled to 10.43% through July 2022 — more than double its growth spread from one year ago.

The variation between gateway and non-gateway inflation rates likely explains a significant part of why we are seeing a similar pattern among commercial real estate price growth.

Apartment

The Apartment market continues to be a stalwart not only for commercial real estate, but for the US economy at large. According to MSCI RCA, Apartment transactions rose by $18 Billion from Q1 to Q2 2022, a 26% increase quarter-over-quarter and up 42% from one year ago.

While transaction volume in the sector has receded from the record highs achieved in 2021, it continues to benefit from robust housing demand amid increasingly limited supply. If Apartment sector volume were to continue its pace set during the first half of this year, it would amount to more than $309 billion in sales, second only to 2021’s record level.

Through Q2 2022, unit prices are up 25.6% year-over-year — an all-time high for the sector. Amid rising prices and increased buyer activity, cap rates have continued to fall to new lows, dropping 10 bps to 4.3% in Q2. Between 2011 and 2019, a rough approximation for the last real estate cycle, cap rates fell an average of 17 basis points annually. According to the latest data, cap rates are down by a weighty half-percentage point from one year ago.

Office

Transaction volume in the Office sector continues to trail pre-pandemic levels as remote work gains what signals to be a permanent foothold in the US labor market. Through the second quarter of the year, MSCI Real Capital Analytics has tracked $57.7 billion worth of Office sales, an improvement from the same period in 2021, but roughly $10 billion below the first-half 2019 pace.

Projecting out the half-year data over the rest of 2022, the annualized total of $115.4 billion would amount to just 80% of both 2021 and 2019 volumes. However, it is worth noting that transaction volumes across most property types tend to peak in the fourth quarter — in the five years before COVID, CRE transaction volume was 22% higher on average during the second half of the year compared to the first. The seasonality was exacerbated in Q4 2021 as inventors readied for the impending Fed tightening cycle — Office sector transactions achieved near record-volume in Q4 2021 ($56.6 billion). The trend suggests that 2022’s first-half improvement over last year may be a more reliable signal than the annualized projection. Still, as 2021 ended, Office investors still largely anticipated a normalization of attendance levels as pandemic-era activity patterns waned. So far in 2022, all evidence has pointed to the contrary, and Office transaction volumes are likely to stall in the fourth quarter of 2022 compared to previous years as a result.

Entering the pandemic, office space on average was transacting at $238 per square foot. Pricing fell to a low of $235 per square foot between Q2 and Q4 2020 and has since rebounded to new highs — reaching $278 per square foot in Q2 2022. As of Q2 2022, office space is transacting at an average of $289 per square foot, up 13.3% year-over-year and 2.2% quarter-over-quarter. Cap rates on Office properties continue to reach historical lows, falling to 6.0% in Q2 2022. Over the past year, cap rate compression in suburban offices has driven much of the reduction in the broader sector.

Retail

The Retail sector has shaken off early pandemic headwinds, registering its highest first-half of the year transaction volume since 2015. Further, through the second quarter of 2022, Retail led all sectors with a 46% year-over-year increase in deal volume. Notably, compared to other CRE types and their sub-sectors, Retail has experienced the largest variation in sales growth between its two sub-sectors over the past 12 months. Transaction volume at shopping centers rose 186% year-over-year through Q2 2022, while shop sales rose just 52%.

Though annual growth has fallen below the triple-digit increases seen throughout 2021, much of last year’s high marks were due to base-effects stemming from an anemic market in 2020. If Retail volume was to continue at its current pace for the remainder of the year, it would set a record $89.2 billion in transaction volume. Considering that this projection does not factor in the typical volume uptick during the fourth quarter, Retail is poised have a banner year in 2022, all else held constant.

Retail cap rates ticked down 10 bps quarter-over-quarter to a new all-time low of 6.0% in Q2 2022. While cap rates in the sector held relatively steady throughout much of the pandemic, they have fallen by 40 basis points over the past year as property values have risen more rapidly than rents. Retail price per square foot reached $313 in the second quarter, the highest mark on record. Moreover, the price per square foot for transacted Retail assets has risen on a year-over-year basis for five consecutive quarters. Prior to the recent string of price growth, annual pricing had declined for four consecutive quarters. Through Q2 2022, Retail price per square is up 24.9% year-over-year, the fastest annual pace on record.

Industrial

The Industrial sector has seemingly had the wind at its back ever since the end of the Great Recession, and this was only intensified by the positive shift in goods consumption that we saw take place during the pandemic. Through the halfway mark in 2022, sector growth remains as strong as ever. According to MSCI Real Capital Analytics, $74.9 billion of Industrial asset sales have changed hands through the first two quarters of 2022, amounting to 134% of 2021’s first-half volume. Annualizing the first two-quarters of sales suggests that the sector is on pace to hit $149.2 billion worth of transaction volume by the end of the year.

Like the pattern evident across all CRE sub-sectors, Industrial transaction volumes could accelerate during the second half of the year. For instance, in Q4 2021 Industrial transaction volume totaled a massive $77.3 billion, roughly $20 billion more than the first two quarters of 2021 combined. While last year’s market was partially fueled by monetary policy tea leaves, if Industrial experiences an uptick in Q4 2022 that is anywhere close to what we saw last year, the sector will set an annual total that is well ahead of what it has to date.

Like all other sectors, cap rates for the Industrial sector continue to chart new lows, falling 10 bps quarter-over-quarter and 40 bps year-over-year. On the other hand, asset pricing continues to reach record highs both in terms of observed levels and annual growth rates. As of Q2 2022, Industrial assets are trading at an average of $175 per square foot, rising $8 from the previous quarter and $32 from one year ago. Through the second quarter, asset price growth in the sector has achieved a new record high of 32.0% year-over-year first achieved in Q1.

 

Macro Economy

The US economy is sending mixed signals, to say the least. Inflation continues to sit near generational highs, with the Consumer Price Index (CPI) climbing by 8.5% over the previous 12 months through July. A flattening of headline CPI between June and July has escalated hopes that the Federal Reserve’s monetary tightening may be having an impact on price pressures. Still, Fed Chair Jerome Powell along with several other FOMC voting members have indicated in recent statements a willingness to push ahead with hikes until the economy has achieved a sustained reduction in price growth.

The feared double-edged sword of rising rates has indeed begun to poke out in both directions. Real GDP declined by an annualized 0.6% in Q2 2022, according to the latest estimate released by the Bureau of Economic Analysis (BEA) in August, the second consecutive quarterly reduction. A fall in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment over the quarter fueled the decline. Notwithstanding, consumer spending remains robust while US exports increased in the second quarter. That sustained economic activity is evident in the continued strength of the labor market, which added 528,000 jobs in July as the unemployment rate ticked down to 3.5%.

Whereas in 2020 and 2021, commercial real estate success was propelled by unprecedented economic stimulus followed by a momentous reopening of the economy, it is now being fueled both by late-cycle demand and the cascading of costs related to supply shortages. The above can be inferred because, while each major sector beside Office saw annual transaction volume climb through Q2 2022, all four sectors saw a decline in the numbers of properties transacted. Builders have sounded the alarm for months on the challenges brought by labor and materials shortages that are hampering their ability to complete new projects. These added costs amid the backdrop of sustained demand are adding significant value to assets.

Each sector of CRE will have its own key factors to lookout for as we progress through the second half of 2022. Apartment assets should continue to benefit from consumers trickling out of the home-buying market and into the rental market. New home sales fell sharply in July, down -12.6% month-over-month and -29.6% year-over year. Much of the would-be housing demand will overflow into apartments, but tenant affordability concerns will likely intensify. The fate of Industrial assets will largely depend on Retail inventory volume in the coming months. Retail inventories excluding autos increased by 1.5% in July, according to the Census Bureau, as pent-up orders from earlier in the year get stocked away. However, many Retail market watchers expect record discounting this holiday season as firms look to reduce inventory — an important signal to keep an eye on.

Office appears to be settling into a new post-COVID equilibrium, but one where quality, accessibility, and amenities are arising as key differentiators for space demand relative to centrality. Retail has enjoyed a size-able rebound so far this year, and where consumer spending evolves from now will be a key barometer for the look ahead. While many consumers remain skittish about inflation and are enduring tough spending decisions in each paycheck, consumer sentiment has begun to rebound from its historic low reached in June.

Even with a few traffic jams along the way, commercial real estate and the US economy as a whole are still moving forward with pace.

About SVN®

SVN International Corp. (SVNIC), a full-service About SVN® commercial real estate franchisor of the SVN® brand, is one of the industry’s most recognized names based on the annual Lipsey Top Brand Survey. With over 200 office locations serving 500+ markets, SVN® provides sales, leasing, corporate services, and property management services to clients across the globe. SVN Advisors also represent clients in auction services, corporate real estate, distressed properties, golf & resort, hospitality, industrial, investment services, land, medical, multifamily, office, retail, self-storage and single tenant investments. All SVN offices are independently owned and operated. For more information, visit www.svn.com.

View More Economic Updates:

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

Commercial Real Estate Economic Update 9.9.22

Featured topics:

  1. Futures Market Forecasts 75 bp Hike

  2. Beige Book Analysis

  3. CMBS Delinquencies

  4. Single Family Rental CMBS Issuance

  5. Independent Landlord Rental Performance

  6. Consumer Sentiment

  7. Jobs Report

  8. Mall Visits Fall Across US

  9. Manufacturing PMI

  10. Post-GFC High for AD&C Loans

1. FUTURES MARKET FORECASTS 75 BP HIKE

• Fed Futures markets are now firmly predicting another 75-bps hike at the FOMC’s September meeting based on estimates from the Chicago Mercantile Exchange.

•Following the committee’s July meeting, future markets were initially forecasting a more moderate increase of 50 bps come the September meeting, as seen in May and June before the Fed turned up the heat. As of September 8th, 86.0% of the Fed Futures market forecasts a 75-bps hike at the Fed’s next meeting on September 20th-21st.

• Since late July, markets have digested several key data points, including above-expectations job growth, a rebound in consumer sentiment, and a modest but unconvincing decline in year-over-year inflation. During recent talks at the annual Jackson Hole Summit, Fed officials also maintained a relatively hawkish tone, signaling a sustained willingness to raise rates to tackle inflation.

2. BEIGE BOOK ANALYSIS

• The September 7th version of the Federal Reserve’s Beige Book shows that economic activity remains relatively unchanged across the nation compared to recent weeks, with most businesses reporting steady or growing activity.

• Most federal reserve districts reported steady consumer spending levels, but purchases are moving away from discretionary items and toward food and other essentials, and inflation pressures mount. Auto sales continued to be hampered by low inventory and high prices, while hospitality and leisure remained relatively strong throughout the summer.

• Commercial real estate experienced softened activity, particularly for office space. Loan demand was reportedly mixed with solid demand for credit cards and commercial and industrial loans, while residential (buying) demand continued to weaken in the face of rising mortgage rates.

3. CMBS DELINQUENCIES

• CMBS delinquencies registered a slight decline in August, falling eight bps to 2.93%, according to Trepp— it is the first time delinquencies have fallen below 3% since the COVID-19 pandemic began.

• Delinquencies have steadily declined over the past two years as most Commercial Real Estate segments recovered, but recent improvements in the Hotel and Retail sectors have fueled the latest reductions.

• August represents the 24th decline in CMBS delinquencies in the past 26 months. Industrial continues to boast the lowest delinquency rate of 0.51% through August. Multifamily follows close behind with a rate of 0.95%. The rate for Office stands at 1.5%, Lodging (Hotel) at 5.18%, and Retail at 6.45%.

4. SINGLE FAMILY RENTAL CMBS ISSUANCE

• A new report by Trepp looks at the rise in Single-Family Rental CMBS issuance in recent years, as the sector has risen from just 7.22% of all CMBS issuance in 2018 to 13.92% so far in 2022.

• According to the analysis, $73.53 billion of Single-Family Rental CMBS has been issued since 2013, dominated mainly by players such as Progressive Residential, CoreVest American Finance, Invitation Homes, and Tricon, which accounted for more than half of all SFR issuance. SFR issuance in 2021 was more than double its 2019 level.

• While it appears that SFR will remain a notable portion of the CMBS market for years to come, the sector has seen a similar slowdown in recent months as seen in the broader CMBS market. Trepp notes that a total of five new deals so far in Q3 totaled $2.11 billion, on pace to fall below the $7 billion total hit in Q2.

5. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time collection rate for independently operated residential properties fell by 55 bps between July and August, landing at 79.7%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.

• Gateway markets have maintained higher on-time payment rates than units located elsewhere for eight consecutive months through August 2022. Measured month-over-month, gateway market on-time collection rates rose by 16 bps but are down 211 bps year-over-year. The July on-time rate for Gateway markets stands at 81.4%, while non-gateway markets registered an on-time rate of 79.5%.

• Sun Belt rentals have underperformed the rest of the US for five consecutive months, standing at 78.4% in August compared to 80.3% for non-sun belt rentals. The Sun Belt’s growing success has seen some affordability issues arise, as markets re-price more quickly than some existing residents can handle.

• 2-4 Family rentals maintained the highest on-time payment rate of all sub-property types in August, rising 52 bps month-over-month.

6. CONSUMER SENTIMENT

• Despite growing recession concerns over the summer, consumer sentiment appears to have stabilized. The University of Michigan’s final August Consumer Sentiment estimate was revised up from 55.1 to 58.2. Moreover, consumer expectations saw a significant revision from a previously estimated 47.3 to a final reading of 58.0.

• The Consumer Sentiment Index has risen from its all-time low level of 50.0 in June, climbing in consecutive months. The upswing has been widespread across most demographics, though lower-income consumers’ sentiment has risen higher in recent readings, even exceeding that of higher-income consumers, bucking the historical trend.

• Inflation expectations have also receded, falling from 5.3% in July to 4.8% in August.

7. JOBS REPORT

• The US econom y added 315,000 jobs in July while the unemployment rate rose slightly to 3.7%, according to the Bureau of Labor Statistics.

• This month’s jobs report fell slightly below expectations and signaled a slight loosening in the labor market. Still, job-adds continue to be strong, notably in professional and business services, health care, and retail trade.

• The uptick in the unemployment rate primarily reflects the reentry of some workers into the labor force, as the US labor force participation rose to 62.4%. Average hourly wages also climbed, increasing 5.2% year-over-year.

• Professional business services employment climbed the most during the month (+68,000), followed by healthcare (48,000) and retail trade (44,000). Meanwhile, leisure and hospitality job gains receded from their recently typical high levels, remaining relatively unchanged from July.

8. MALL VISITS FALL ACROSS U.S.

  • Globe Street reporting of an analysis by Placer.ai finds that visits to American malls have started to decline as inflation eats into consumers’ wallets, falling in August after two consecutive years of increases.

• Year-over-year foot traffic to indoor malls, open-air lifestyle centers, and outline centers declined during the month. Indoor malls saw the steepest fall from the month before, falling by 1.1% month-over-month.

• Despite the declines, their shallow nature presents a dose of optimism for brick-and-mortar businesses in the face of recent economic headwinds. According to the Placer.ai report, all three segments of the mall sector ended August more strongly than they began, with indoor malls and open-air centers posting their most significant week-over-week gain since June 27th. Moreover, Retail REIT Simon Property Group recently reported strong occupancy and leasing volume, showing a 26% year-over-year increase in sales per square foot through the second quarter of 2022.

9. MANUFACTURING PMI

• S&P Global’s US Manufacturing Index declined to its slowest growth rate since July 2020 during August, registering a reading of 51.5. An index reading above 50 indicates growing activity in the sector, while a reading below 50 indicates declining activity.

• New orders reportedly fell for the third consecutive month amid weak client demand caused by high inflation and rising economic uncertainty. Output also contracted for the second consecutive month.

• On the flip side, supply chain disruptions are reportedly the least severe that they have been since October 2020, while input price inflation was its slowest since January 2021.

10. POST-GFC HIGH FOR AD&C LOANS

• In the second quarter of 2022, acquisition, development, and construction (AD&C) loan volume reached its highest level since the Great Financial Crisis, according to an analysis by the National Association of Home Builders (NAHB).

• However, pushing up volume levels is a rise in loan balances stemming from homes remaining in inventory for longer as homebuying slows, filtering into a slowdown in home-building activity.

• Balances are expected to decrease in the coming months as rising borrowing costs slow the rate of new borrowing. According to NAHB’s latest survey on AD&C financing conducted in August, the average effective rate on AD&C loans rose across all loan types between Q1 and Q2. The rate on Land acquisition loans rose from 6.32% to 8.19 quarter-over-quarter. Land development loans saw rates climb from 7.85% to 9.55%. Speculative single-family loans saw rates rise from 7.38% to 8.48, while pre-sold single-family loan rates rose from 7.90% to 8.63%

 

SUMMARY OF SOURCES

  1. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

(2) https://www.federalreserve.gov/monetarypolicy/beigebook202209.htm

(3) https://www.trepp.com/instantly-access-delinquency-report-august-2022?hsCtaTracking=6851c4cd6d3a-4f5c-895d-3e93db2cd92b%7Cd6075c9b-7c7e-49f6-aec4-d810563171a9 

(4) https://www.trepp.com/trepptalk/single-family-rental-issuance-flourishes-will-lending-continuewhat-does-it-mean-for-affordability

(5)chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.chandan.com/_files/ugd/df56fe_4e79d75ae2db4bb9a890fbe35f9eb9bc.pdf

(6)http://www.sca.isr.umich.edu/

(7) https://www.bls.gov/news.release/empsit.nr0.htm

(8) https://www.globest.com/2022/09/08/mall-visits-slump-as-inflation-heats-up/

(9) https://tradingeconomics.com/united-states/manufacturing-pmi

(10) https://eyeonhousing.org/2022/09/adc-loan-balances-rise-as-sales-slow/?_ ga=2.64372591.1796051761.1662673965-1254428321.1662496463

 

View More Economic Updates:

Economic Report 8.26.2022

Economic Report 5.13.2022

Economic Report 3.18.2022

Economic Report 2.25.2022

 

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