Archives for August 2023

Virtually every confidence indicator is on the rise and the threat of an imminent recession is falling while recent data show that inflation is nearing the Federal Reserve’s goals set more than a year ago.

The overall inflation number reported last week was not what many wanted, as gasoline and food prices led it upward by 20 bps to 3.2%.

John Chang, research, Marcus & Millichap broke down the overall number in a recent video from his firm.

“If you strip out food and gas and look at core inflation, which is a more meaningful number and something the Fed is paying closer attention to, inflation actually went down by 10 basis points to 4.7%, Chang said.

He said two main pressure points are keeping inflation elevated: Services and housing.

Services inflation remains elevated, but it has been going down every month since February this year when it peaked at 7.3%.

Last month, services inflation went down another 10 basis points to 6.1%, and “we’re likely to see services consumption ease in the coming months as excess savings are burned off and that should further reduce the services inflation pressure,” Chang said.

As for housing, it’s commonly known that housing inflation is a trailing indicator. It has also been coming down steadily since peaking at 8.1% in January this year.

Last month, housing inflation declined by another 10 basis points to 6.2% and Marcus & Millichap expects that trend to continue as both home prices and apartment rent growth have flattened considerably.

Therefore, by excluding gas, food, and housing inflation from the headline CPI number, then the core minus housing inflation rate is just 2.5%.

“So overall, inflation is going the right direction and as housing inflation recedes, core inflation should move back toward [the Fed’s goal of] 2%,” Chang said.

Meanwhile, Wall Street has already recalibrated the likelihood of the Fed keeping rates flat in upcoming meetings, with a 90% likelihood that the Fed will not change rates at their September meeting, a 75% probability of no change in November, and a 68% chance that the Fed will hold rates steady in December.

The prospect of falling inflation and interest rate stability has given a boost to all confidence indices.

Consumer confidence has been on the rise for the last couple of months and is now at its highest level since July 2021.

Consumer sentiment, which can strongly align with apartment demand is also trending up.

CEO Confidence, which can influence economic growth is also on the rise, and small business optimism has also made gains.

Something interesting is that commercial real estate transaction activity seems to move in tandem, Chang noted.

“If you look at the year-over-year change in small business optimism and compare it to the year-over-year change in commercial real estate transactions, there is a pretty strong correlation,” Chang said.

“That’s not to say necessarily that small business optimism drives commercial real estate transactions. The more likely case is that the forces influencing small business optimism, also influence commercial real estate investor decisions.”

Nonetheless, the recent upswing in small business optimism suggests that a recovery of commercial real estate transactions could be in the cards for later this year, Chang projected, noting that numerous indicators are looking increasingly positive.

That includes inflation, interest rates, confidence levels, and recession risk, and that in turn suggests positive momentum for commercial real estate investment, he said.

There are always risks, he added, for example, a severe hurricane season or if the banking sector takes another hit, or there’s another major geopolitical incident, then soft metrics like confidence level could be negatively impacted, “but at this point, the outlook is strengthening,” he said.

“Think about that for a minute. Right now, inflation is generally trending lower.”

Source: “Improving Indicators Bode Well For CRE Later This Year“

Replace people with machines? The growing fear in the current wave of generative AI has had an ironic improvement on hiring certain types of workers — and the need for office space in high tech — according to Moody’s Analytics.

“The national office market has been on rocky footing for a few years now, but better leasing activity combined with limited construction prevented vacancy rate spikes as expected this quarter – vacancy actually fell to 18.8%, while rent grew by 0.2%. What else was happening in Q2? Artificial intelligence (AI) investment skyrocketed in the tech sector,” they wrote.

That is a correlation, not necessarily causation, but then correlation also doesn’t inherently mean that there can’t be causation.

In Q1, Moody’s did some reshuffling of emerging and established tech designations of metros. Afterwards, they found that the emerging group of metros saw office vacancy rates decline by 70 basis points. Established tech metros had flat vacancies. The national average dropped by 20 basis points.

Much of the activity was concentrated in a handful of examples. Nashville saw a drop of 340 basis points. Another Tennessee metro, Knoxville, was down 160 basis points. Buffalo, New York had a 90-basis point drop. Though the worst emerging market performance was the 50-basis point-increase in Norfolk, Virginia.

Similarly, what slowed established tech locations was another handful of metros where vacancy rates were up significantly higher than the national average. “Denver, Dallas, San Francisco, and Washington, DC were the main culprits: they saw vacancy increases of 100 bps, 90 bps, 60 bps, and 60 bps, respectively,” they wrote. “Of all the tech and emerging markets covered, 12 saw vacancy drops while 14 markets that saw a vacancy increase or flat movement.”

Then there were rents, with 0.4% growth in emerging markets and 0.2% in established tech markets as well as the national average.

“The strongest performing metros were littered with both emerging and established markets as the top four overall markets consisted of emerging markets Knoxville (1.1%) and San Bernardino (0.7%) and established markets Dallas (0.9%) and Baltimore (0.7%),” Moody’s wrote. “Out of the 11 emerging markets, Norfolk was the only emerging market with a rent drop, but it was only a minor 0.1% decline. Out of the 15 established tech markets, rents dropped in only three. San Francisco saw a sizable drop of 0.7% while Austin and San Jose decreased 0.2% and 0.1%, respectively.”

Moody’s takes the results as having been a product of the emergence of generative AI as a significant type of product. At the same time, they acknowledge that hype is nothing new in the tech industry. “The real question, though, is when and how companies will turn a profit on this advanced technology,” they added. “With specialized chips and data servers making the entire endeavor expensive to run, there needs to be a payoff with revenue-generating products that come along with it. Only then will it separate itself from past innovations that produced similar hype. Overall, the industry is confident that in due time this will be the case.”

It could be real and a boon to office needs in tech. But that doesn’t mean a net improvement, because one of the unstated but clear implications of AI technology is a reduction of headcount in multiple areas, because if it were more “efficient” financially and cheaper — and that’s compared to headcount, not to older computers, because the goal is to remove cost — why would companies keep on those now redundant employees? And that could mean as much if not more office space lost to AI than gained from it.

Source: “AI Investment Is Giving Tech Office Markets A Boost“

Offices are struggling. Multifamily distress is popping up. But the retail market, long predicted to be doomed by the pandemic and e-commerce, keeps chugging along above the fray.

Retailers are enjoying healthy activity, demand and other key metrics in a turn from the struggles seen in the rest of commercial real estate, the Wall Street Journal reported. Stores are opening by the thousands against closings, while availability in the sector continues to drop, creating an opportunity for landlords to raise rents.

This year, retailers have announced plans to open 4,500 stores and close 3,500, according to Coresight Research. In the case of companies that are fading away altogether, like Christmas Tree Shops and Bed Bath & Beyond, others are rushing to fill the space left by the latter.

Retail availability dropped to 4.8 percent in the second quarter, according to CBRE. That’s the lowest vacancy rate the firm has recorded in its 18 years of tracking. Asking rents, meanwhile, are up 6.3 percent since 2020’s second quarter, when the pandemic loomed large over shoppers, to exceed an average of $23 per square foot for the best in a decade.

“Retail is outperforming,” said Conor Flynn, CEO Kimco Realty, the shopping center owner that increased asking rents by more than 30 percent in the second quarter.

One of the biggest factors keeping retail going is a decline in construction since the 2008 financial crisis. An oversupply of space dominated the market then, but that problem has eased in the last 15 years, in part because retailers have deployed technology to improve the efficiency of planning brick-and-mortar locations.

Additionally, reports of the death of brick-and-mortar shopping at the hands of e-commerce have been greatly exaggerated. Shoppers are still hitting stores in person, leading some online retailers to increase their physical footprint. Shoppers haven’t been deterred by inflation, increasing spending in four consecutive months, according to the Commerce Department.

There are some weak spots in retail, though. High-end malls are hanging on, but low-end malls are struggling, especially enclosed ones that are feeling a pinch as retailers flock to higher quality, open-air properties. A majority of distress sales involving retail properties this year have featured malls, according to MSCI Real Assets.

Source: “Retail defies commercial real estate’s troubles“

Retailers are on track to open 1,000 net new stores in the U.S. this year as retail availability hits record lows, in fresh signs of the sector’s resilience despite turmoil in commercial real estate.