Archives for July 2022

Recession: Will It or Won’t It?

July 29, 2022 by CARNM

The smart move is to not worry about such categories and focus instead, as always, on risk management.

Even as the Bureau of Economic Analysis released its preliminary GDP growth estimate for the second quarter—down at an annualized rate of 0.9%, which is better than the -1.6% in Q1—the takes came in hot as befits a world struggling with climate change.

“There absolutely is not a recession yet,” came from some quarters, while others noted that, no way to know yet, but maybe one has already started.

It’s the economic equivalent of the “who’s on top?” guessing game in politics. And the trigger is the incorrect notion that two quarters of declining GDP growth is the definition of a recession, which it isn’t. That assumption was put into motion on Sunday, December 1, 1974 in a New York Times op-ed by Julius Shiskin, a commissioner of the Bureau of Labor Statistics, who offered the concept as a “rough translation” of how the National Bureau of Economic Research (NBER), which makes the official call on U.S. recessions, undertakes its qualitative analysis of the economy.

But the call is more difficult. Was the first quarter’s drop really all that it seemed? “The first quarter was marred by a widening trade deficit due a surge in imports,” said Cornerstone Wealth chief investment officer Cliff Hodge in an emailed note. “This quarter a slowdown in inventory accumulation tipped GDP growth into the red. Neither of these readings provide much of an indication to the strength in the underlying economy.”

And Jeffrey Roach, chief economist for LPL Financial, wrote, “Consumer spending was too strong to raise any recession signals. Given the solid demand for imports last quarter, total trade subtracted 1.4 percentage points off the headline growth estimate. Consumers shifted from buying goods to buying services and after adjusting for inflation, real consumer spending rose 1% annualized from last quarter.”

Then again, J.P. Morgan Asset Management chief global strategist David Kelly wrote, “This morning’s second quarter GDP report was a significant disappointment with real output falling.” Noting that the NBER has a complex view of what recessions are, which includes declines in employment, which haven’t happened, Kelly added, “However, today’s report is further evidence that the U.S. economy is quickly losing momentum and increases the likelihood that even the broadest definition of recession will be met before the end of the year.”

The most effective approach in any industry is to focus not on a label but rather on risk management. The Fed increased its baseline interest rate again on Wednesday, adding to the pressure on commercial real estate. Financing keeps getting more expensive and so buyers want a discount as a result.

Interest rates are also rising on consumer credit cards, which is “leading to substantially higher costs for anyone with credit card debt,” according to CreditCards.com senior industry analyst Ted Rossman.

Beyond the “how much did consumers spend last quarter” rubric—an important question as almost 70% of GDP depends on the answer—consumer confidence, as measured by the Conference Board, has fallen the last three months. Perhaps they know something about their own circumstances that the experts don’t.

Forget the recession title for a moment, as any given one doesn’t necessarily affect all sectors equally. There are many factors pushing and pulling CRE. That happens both directly, like financing costs, and indirectly, with the question of whether consumers might start softening spending, which would affect businesses and, so, office and retail and industrial property types.

Risk management and mitigation are foundations of any business. Across industries, many larger companies have already focused on aspects of this. “For the first time in a decade, the 1000 largest public companies in the U.S. improved performance of all three major working capital components last year – they managed inventory more effectively, collected from customers faster, and took longer to pay suppliers,” according to The Hackett Group.

Especially with the impact rising interest rates can have on the viability of CRE projects, now is a good time for investors, owners, operators, and developers to look at cash management, overhead efficiencies, and other aspects of business that might help make whatever comes to be more easily borne.

Source: “Recession: Will It or Won’t It?“

Big Construction Starts Gain in Many Top Metros

July 29, 2022 by CARNM

Starts up 18% on average.

The first half of 2022 was big in construction starts, says Dodge Construction Network. “During the first six months of the year, the value of commercial and multifamily construction starts in the top 20 metropolitan areas of the U.S. increased 24% from 2021.” On average, national starts were up 18% year to date.

Three major metros—Seattle, Los Angeles, and Philadelphia—among the top 10 in dollars faced a decline compared to the first half of 2021.

The biggest driver of the increase was demand for apartments and condos. As many analyses and statistics suggest, the combination of major geographic shifts and a long-standing large gap between housing needs and construction have helped boost activity. There has also been gating factors of supply chain problems, sky-high materials prices, and labor shortages that delayed many projects last year.

But the construction market has recovered, and beyond multifamily. “A nascent recovery in the commercial sector, however, has created more broad-based improvements across the country,” Dodge noted. “These increases are even more considerable as the sector continues to combat rising prices, shortages of key materials and labor, and higher interest rates.”

The top metro area was New York, which saw $15.3 billion in construction starts, or an increase of 20% over the same period in 2021. At $8.1 billion was Dallas, a jump of 72%. Number three was Washington, D.C., a 35% increase at $5.5 billion.

Some others of the top 10 that saw positive increases were Miami, Austin, Phoenix, and Atlanta. They ranged from $4.2 billion to $4.5 billion and increases of 31% to 70%.

The next 10 in dollar performance saw an even split between those that had a percentage increase year over year—Houston, Denver, Orlando, Tampa, and San Jose—and those that dropped (Boston, Chicago, Nashville, Minneapolis, and Kansas City).

The first 10 accounted for 40% of all commercial and multifamily starts. That was up from 37% last year. The second 10 were 16%, which was down from 2021’a 18%.

There is an important caveat to the study. “Not included in this ranking are institutional projects (e.g., educational facilities, hospitals, convention centers, casinos, transportation terminals), manufacturing buildings, single family housing, public works and electric utilities/gas plants,” Dodge noted. Given the success of industrial, just in warehousing and logistics, that’s a significant omission.

“The construction sector is at a crossroads,” Richard Branch, chief economist for Dodge Construction Network, says in prepared remarks. “The recovery from the pandemic morphed in 2022 by encompassing more sectors than just warehouses and single-family housing despite rampant inflation in construction materials, a lack of key goods, and a stark shortage of skilled construction labor.”

But with the state of the economy and the Fed’s moves to reduce inflation, “construction starts are likely to move sideways over the second half of the year and potentially stall as the calendar shifts into 2023,” Branch said.

Source: “Big Construction Starts Gain in Many Top Metros“

U.S. Economy Shows Another Decline, Fanning Recession Fears

July 28, 2022 by CARNM

Gross domestic product, in an initial reading, fell 0.2 percent in the second quarter. President Biden said any troubles would be transitory.

A key measure of economic output fell for the second straight quarter, raising fears that the United States could be entering a recession — or perhaps that one had already begun.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the Commerce Department said Thursday. That drop followed a decline of 0.4 percent in the first quarter. The estimates for both periods will be revised in coming months as government statisticians get more complete data.

News of the back-to-back contractions heightened a debate in Washington over whether a recession had begun and, if so, whether President Biden was to blame. Economists largely say that conditions do not meet the formal definition of a recession but that the risks of one are rising.

For most people, though, a “recession” label matters less than the economic reality: Growth is slowing, businesses are pulling back and families are having a harder time keeping up with rapidly rising prices.

“We’re absolutely losing momentum,” said Tim Quinlan, a senior economist for Wells Fargo. “Income gains at minimum have struggled to keep pace with inflation, and that’s what is chipping away at people’s ability to spend.”

A deceleration, on its own, isn’t necessarily bad news. The Federal Reserve has been trying to cool the economy in a bid to tame inflation, and the White House has argued that the slowdown is part of an inevitable and necessary transition to sustainable growth after last year’s rapid recovery.

“Coming off of last year’s historic economic growth — and regaining all the private-sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” Mr. Biden said in a statement issued after the release of the G.D.P. report. “But even as we face historic global challenges, we are on the right path, and we will come through this transition stronger and more secure.”

Still, forecasters in recent weeks have become increasingly concerned that the Fed’s aggressive moves — including raising interest rates three-quarters of a percentage point on Wednesday for the second month in a row — will result in a recession.

Jerome H. Powell, the Fed chairman, acknowledged that the path to avoiding a downturn was “narrowing,” in part because of global forces, including the war in Ukraine and strict pandemic policies in China, that are beyond the central bank’s control.

“When you’re skating on thin ice, you wonder about what it would take to push you through, and we’re on thin ice right now,” said Diane Swonk, the chief economist for KPMG.

Matthew Martin, 32, is paying more for the butter and eggs that go into the intricately decorated sugar cookies he sells as part of a home business. At the same time, his sales are falling.

“I guess people don’t have as much money to toss at cookies right now,” he said.

Mr. Martin, a single father of two, is trying to cut back on spending, but it isn’t easy. He has replaced trips to the movies with day hikes, but that means spending more on gas. He is hoping to sell his house and move into a less expensive place, but finding a house he can afford to buy has proved difficult, especially as mortgage rates have risen. He has thought about finding a conventional 9-to-5 job to pay the bills, but he would then need to pay for child care for his 4-year-old twins.

“Honestly, I’m not 100 percent sure what I’m going to do,” he said.

When G.D.P. fell in the first three months of the year, some dismissed the decline as a fluke, the result of quirks in how the government accounts for spending and investment. Underlying measures of demand remained solid, and many economists thought it was likely that the first-quarter data would eventually be revised to show a modest gain.

The second-quarter decline, though milder, is harder to dismiss. Home building dropped sharply, business investment stalled and after-tax income, adjusted for inflation, fell. Consumer spending, the bedrock of the economy, grew, although at its slowest pace since the first months of the pandemic.

“The second quarter is really closer to the definition of a bona fide slowdown,” said Gary Schlossberg, a global strategist with Wells Fargo Investment Institute. “What we saw in this quarter was an outright decline in domestic spending.”

Economists often use two quarters of falling G.D.P. as a shorthand definition of a recession. In some countries, that is the formal definition.

But in the United States, declaring a recession falls to a private, nonprofit research organization, the National Bureau of Economic Research. The group defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months,” and it bases its decisions on a variety of indicators — usually only months after the fact.

Some forecasters believe a recession can be avoided, if inflation cools enough that the Fed can slow interest rate increases before they take too much of a toll on hiring and spending.

The economy still has important areas of strength. Job growth has remained robust, and, despite a recent uptick in filings for unemployment insurance, there is little sign of a broad increase in job losses.

Households, in the aggregate, are sitting on trillions of dollars in savings built up earlier in the pandemic, which could allow them to weather higher prices and interest rates.

“What drives the U.S. consumer is the healthy labor market, and we should really focus on job growth to capture the turning point in this business cycle,” said Blerina Uruci, an economist at T. Rowe Price. The Labor Department will release data on July’s hiring and unemployment next week.

The lingering effects of the pandemic are making the economy’s signals harder to interpret. Americans bought fewer cars, couches and other goods in the second quarter, but forecasters had long expected spending on goods to fall as consumers shifted back toward prepandemic spending patterns. Indeed, economists argue that a pullback in spending on goods is needed to relieve pressure on overstretched supply chains.

At the same time, spending on services accelerated. That could be a sign of consumers’ resilience in the face of soaring airfares and rental car rates. Or it could merely reflect a temporary willingness to put up with high prices, which will fade along with the summer sun.

“There is going to be this element of, ‘We haven’t had a summer vacation in three years, so we’re just going to take one, no matter how much it costs,’” said Aditya Bhave, a senior economist for Bank of America. “The question is what happens after the summer.”

Avital Ungar is trying to interpret the conflicting signals in real time. Ms. Ungar operates a small business running food tours for tourists and corporate groups in San Francisco, Los Angeles and New York.

When restaurants closed and travel stopped early in the pandemic, Ms. Ungar had no revenue. She made it through by offering virtual happy hours and online cooking classes. When in-person tours came back, business was uneven, shifting with each new coronavirus variant. Ms. Ungar said demand remained hard to predict as prices rise and the economy slows.

“We’re in two different types of uncertainty,” she said. “There was the pandemic uncertainty, and then there’s the economic uncertainty right now.”

In response, Ms. Ungar has shifted her focus to higher-end tours, which she believes will hold up better than those aimed at more price-sensitive customers. And she is trying to avoid long-term commitments that could be difficult to get out of if demand cools.

“Every annual plan I’ve done in the past three years has not happened that way,” she said. “It’s really important to recognize that what worked yesterday isn’t going to work tomorrow.”

Source: “U.S. Economy Shows Another Decline, Fanning Recession Fears”

Despite Headwinds Industrial Demand Remains Strong

July 27, 2022 by CARNM

Even with a slowing economy, certain factors still drive this market segment.

A new report from Savills on the US industrial market for the second quarter of 2022 says that demand is still strong, but that has a lot to do with the market and some quirks about the general economic environment. It’s another puzzle piece that fits in with observations from other sources.

As Savills notes, there are major macroeconomic concerns. The country may be headed into a recession. GDP growth is down, and inflation is high, with a tight labor market and ongoing supply chain issues contributing. The Federal Reserve has been boosting its benchmark interest rate and that, as it was supposed to, has pushed up other interest rates as a result. Higher interest means a foot on the economic brake pedal from more expensive financing.

Commercial real estate has already felt the impact and likely will even more if the Fed, as expected, adds another 75 basis points to its rates on Wednesday.

And yet, as Savills notes, “The data is not yet indicating any measurable pullback with year-to-date net absorption ahead of the first half of 2021.” Industrial vacancies are at an all-time low of 3.9%, and sublease space is averaging only 0.3%, “exceptionally low.” Blackstone has said much the same as it expects record-low industrial vacancies.

About 818 million square feet of new industrial is under construction, according to Savills, but that is slow going. The firm points to supply chain issues, but as others in the industry have noted, also having an effect are higher financing costs—developers have to decide whether they can afford to move ahead—and labor shortages. Even if you have the money and the materials, someone has to put everything together, and those who can are in high demand.

Now add the industrial land crisis, as CommercialEdge put it. “In June, the average in-place rents grew 4.9% year-over-year, the vacancy rate fell to 4.6% and the average cost of a new lease signed in the last 12 months was 88 cents higher per foot than the overall average,” the firm wrote. “Supply of new industrial space cannot maintain pace with demand, a problem more pronounced in areas where geography limits the amount of land available for development. Port markets, and Southern California in particular, are most attuned to this issue.”

Rent growth is expected to moderate, says Savills, which is good for tenants as the one-year asking rent increase in the U.S. was 11% last quarter. Hot markets of Los Angeles and the Inland Empire were over 51% each. Northern New Jersey hit 46.6%. More “moderate” but still in-demand areas like Houston, South Florida, Baltimore, and Columbus ranged from nearly 18% to over 19%.

But, still, landlords continue to hold the pricing advantage so long as demand is high and supply, low.

Source: “Despite Headwinds Industrial Demand Remains Strong“