SVN | Research Economic Update 06.26.2025

• According to ATTOM’s May Foreclosure Report, housing foreclosures decreased by 1.0% in May but remained 9.0% higher over the past year.
• The report noted a mixed picture, where fewer foreclosure starts occurred alongside a continued rise in completed ones.
• Delaware, Florida, and Illinois posted the highest foreclosure rates in May. Among the top 100 metros, three Florida markets —Lakeland, Cape Coral, and Jacksonville —registered the highest number of foreclosures.
• Meanwhile, foreclosure starts increased the most in Texas, Florida, and California, respectively. Nationwide, one in every 4,009 housing units had a foreclosure filing in May.

5. MARKETS MOST EXPOSED TO FEDERAL JOB CUTS

• According to a recent analysis by Chandan Economic, while residential and office demand in Washington D.C. stands to be most affected by federal government job cuts, smaller metros with less diverse economies, such as Anchorage, Honolulu, and Charleston (SC), may also be strongly impacted.
• Housing inventory in the D.C. area has already climbed substantially during the first half of 2025, up 44.8% year-over-year compared to a nationwide average of 32.5%, according to Altos.
• However, compared to relatively smaller and more isolated metros, such as Anchorage and Honolulu, D.C. has a more diversified industry base and is positioned along the nation’s Northeast Corridor—a key engine of economic activity.
• While pro-growth elements of the Budget Reconciliation package, which is poised to enact steep federal budget cuts, may spur private investment in these regions, such investments could take time to materialize.

6. POTENTIAL SECTORS FOR OFFICE DISTRESS BUYS

1. FOMC MEETING MINUTES

• The meeting minutes from the FOMC’s May 6-7 policy meeting show that officials see increased recession risks in the wake of tariffs, arguing that a recession is now “almost as likely” as their baseline forecast of low GDP growth for 2025.
• Officials held rates unchanged at their May meeting as they wait to see where their most considerable policy risks develop, with the risks of both price stability and labor market deterioration hanging in an uncertain balance.
• Meeting participants warn that they may face “difficult tradeoffs” if inflation proves to be more persistent than anticipated while the US growth outlook deteriorates. They note that economic uncertainty had increased relative to their last policy meeting, justifying their continued wait-and-see approach to rate changes.
• While labor market indicators continue to prove resilient, officials note that the risk of short-term deterioration in the labor market has increased in recent months and that the outcome will heavily depend on how proposed trade and fiscal policies develop.
• Officials expressed that they would be willing to amend their “wait-and-see” approach if tariffs worsen inflation pressures enough to weaken labor market fundamentals.

2. COMMERCIAL PROPERTY PRICES

1. LEADING ECONOMIC INDEX

• The Conference Board’s US Leading Economic Index (LEI) fell by 0.7% in March, pointing to slowing economic activity in the near term.
• March’s decline coincided with soaring economic uncertainty ahead of tariff announcements. Consumer expectations fell, and stock prices experienced their largest monthly decline since September 2022.
• The Conference Board stresses that its index does not suggest an impending recession but revised its 2025 US GDP forecast to just 1.6%.

2. CONSUMER SENTIMENT

• According to data from the University of Michigan, US consumer sentiment plummeted in April from an index level of 57 in March to 50.8, its lowest since June 2022.
• It was the fourth consecutive monthly decline in consumer sentiment, while the index has contracted more than 30% since December.
• Moreover, a sub-index of the survey that zeros in on consumers’ short-term expectations fell to its lowest since May 1980.
• Growing concerns about the trade war and elevated economic uncertainty, two forces that have reached a crescendo in recent weeks, are driving the decline.
• According to the survey’s researchers at the University of Michigan, the latest survey results contained several potential recessionary signals, with consumers reporting falling expectations for business conditions, personal finances, incomes, inflations, and the labor market.

3. BEIGE BOOK

1. CONSUMER CONFIDENCE

• US Consumer Confidence dipped sharply in March, according to the Conference Board’s latest numbers.
• The index fell 7.2 points to 92.9, its fourth consecutive monthly decline and lowest reading since January 2021. The reading fell short of expectations.
• Consumers’ increasing concerns about their financial futures are weighing down on the index as the measure of Americans’ short-term expectations for income, and the job market is now at its lowest level in 12 years.
• The present-situation part of the index remains higher but is also on a downtrend as consumers signal increasing anxiety over tariffs and inflation.
• The Conference Board notes that the metric of short-term expectations is well below the recession-indicating threshold of 80. Meanwhile, the share of US consumers anticipating a recession sits at a nine-month high.

2. BUSINESS UNCERTAINTY

• The Atlanta Federal Reserve’s latest monthly survey of business uncertainty shows that sales revenue growth expectations have risen recently, but firms remain more uncertain about future sales growth than they were prior to the pandemic.
• The panel of senior finance and managerial professionals has reported considerably slower nominal sales growth over the past two years. The past several months have seen a modest revival of sales growth expectations. However, elevated uncertainty leaves current forecasts on a shakier footing than estimates made under less volatile economic conditions.
• Expectations around year-ahead employment growth have similarly improved, while uncertainty about unemployment growth has returned to pre-pandemic levels. As of March, most firms don’t foresee drastic changes to working arrangements over the coming year, with fully in-person employees accounting for 68.1% of full-time workers.

3. FED INTEREST RATE DECISION

• Fed policymakers kept interest rates unchanged at their March meeting, holding the federal funds rate at 4.25-4.50%, which was in line with market expectations.
• In its post-meeting statement, the FOMC acknowledged that the uncertainty around the economic outlook had increased and that they were attentive to risks on both sides of its dual mandate.
• Despite the nod to rising uncertainty, officials affirmed their expectations of reducing rates by an additional 50 basis points (bps) by the end of the year, which, for context, is in line with their December 2024 projection.
• The Fed statement highlights that recent indicators show continued economic expansion with a stable unemployment rate and solid labor market conditions. They also noted that inflation remains somewhat elevated and that they will continue to monitor incoming data and its potential implications on the economic outlook.

4. FOMC ECONOMIC PROJECTIONS

• The FOMC’s latest Summary of Economic Projections, released during every other policy meeting, cut the median GDP growth forecast for 2025, 2026, and 2027 compared to December while raising forecasts for PCE inflation in 2025 and 2026.
• The median real GDP growth forecast for 2025 was cut from 2.1% in the December projections to 1.7% as of the March projections. The real GDP forecast for 2026 was revised down from 2.0% to 1.8%, and 2027 revised from 1.9% to 1.8%.
• The median PCE inflation forecast for 2025 was raised from 2.5% to 2.7%. For 2026, the inflation forecast is up slightly from 2.1% to 2.2%. The Committee kept the inflation forecast for 2027 unchanged at 2%.
• The unemployment rate is expected to be slightly higher this year at 4.4% compared to 4.3%, but no changes were made for the 2026 and 2027 forecasts, each at 4.3%.

5. NAIOP INDUSTRIAL SPACE DEMAND FORECAST

• According to NAIOP’s Q1 2025 Industrial Space Demand Report, in 2024, the Industrial sector experienced its lowest annual rate of net absorption in 13 years.
• NAIOP reports that Industrial net absorption in the second half of 2024 totaled 96.9 million square feet, bringing the annual volume to just 170.8, its lowest since 2011.
• The report notes that elevated long-term interest rates have been a key reason for slowing space demand.
• Analysts forecast that net absorption will slow further during the first half of 2025 to a projected 52.2 million square feet before accelerating in the second half to end the year with a total of 156.4 million square feet absorbed.
• In 2026, Industrial net absorption is expected to climb back to 224.9 million square feet as elevated interest rates are expected to gradually normalize, though not return to the low-rate equilibrium of the past decade.

6. FASTEST GROWING CITIES

• According to a Business Insider analysis of the recently released 2024 metro-level population estimates by the US Census Bureau, most US metros saw populations increase last year, while Florida metros were among the fastest.
• Ocala, Florida (FL) and Panama City, FL, grew by 4.0% and 3.8%, respectively, last year. Meanwhile, Myrtle Beach, South Carolina, aligned with Panama City’s 3.8% growth.
• Another notable Florida metro includes Lakeland-Winter Haven, which grew by 3.5%. Provo, Utah, and Daphne, Alabama, were honorable mentions at 3.0% each.
• Immigration was key to the growth, with each metro area experiencing positive net international migration during the year.
• Notably, cities like Midland and Odessa in Texas, which experienced pandemic-era population declines, were some of the fastest-growing metros in 2024.

7. CO-WORKING SPACES CLIMB 25% IN A YEAR

• According to Commercial Edge’s latest National Office Report, co-working locations surged 25% year-over-year through February, coinciding with a 15.2% increase in overall square footage.
• Co-working spaces have grown in popularity since the pandemic and are helping to fill a gap in the demand for space by working professionals.
• As a percent of total office stock, co-working spaces increased 30 basis points from February 2024 to 2.0% as of the latest tally.
• While still a significantly small portion of national office space, co-working’s momentum in individual regions and sectors makes it increasingly important in several local office markets.
• The Southeast region of the United States leads in total co-working spaces with 1,960 spaces, up 24.2% year-over-year. The West follows closely with 1,709 spaces and has grown 16.7% in the past year.
• In the Northeast, there are a total of 1,422 spaces, which is a 17.5% increase over last February. The Midwest has 1,121 spaces, up 27.7% year-over-year. The Southwest has 999 spaces, up 18.8% year-over-year.
• The average size of co-working locations has decreased in the past year, which is expected to continue but mostly reflects the sub-sector’s shift into the suburbs as central business districts gradually normalize.

8. HOMEBUILDER CONFIDENCE

• Builder confidence dropped to its lowest level in seven months in March, according to the latest reading from the NAHB/Wells Fargo Housing Market Index.
• Both sales conditions and prospective buyer traffic for newly built single-family homes worsened during the month. Sales expectations for the next six months held steady.
• According to an NAHB statement following the data release, builders continue to face labor and lot shortages, while tariff issues exacerbate material cost challenges.
• Meanwhile, builders are beginning to see regulatory relief, such as in the Administration’s recent pause in the 2021 IECC building code requirement.

9. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• According to the latest Chandan Economics-Rent Redi Independent Landlord Rental Performance Report, in March 2025, the on-time payment rate in independently operated rental units jumped by 53 basis points (bps), rising to 85.7%.
• This month’s 53 bps jump was the most substantial single period of improvement in on-time rental payments in two years.
• Compared to a year earlier, on-time payments are down slightly by a quarter of a percentage point (-25 bps). On-time collection rates have now fallen annually for the past twenty (20) consecutive months. However, the pace of annual increase has meaningfully lessened in recent months
• The forecast full-payment rate improved for the second straight month, rising to 94.7%.
• Western states continue to hold the highest on-time payment rates in the country, led by Idaho, New Mexico, Alaska, California, and Utah.
• 2-4-family rental properties and single-family rentals held the highest on-time payment rates in February, coming in at 85.7%.

10. RETAIL SALES

• US Retail sales rose 0.2% month-over-month in February, rebounding from a downwardly revised 1.2% decline in January but still below forecasts.
• Seven of the report’s 13 categories registered a decline during the month. This included food services & drinking places (-1.5%), gasoline stations (-1%), clothing stores (-0.6%), motor vehicle & parts dealers (-0.4%), sporting goods, hobby, musical instrument, & bookstores (-0.4%), miscellaneous store retailers (-0.3%) and electronics & appliance stores (-0.3%).
• Meanwhile, increases were seen in sales at non-store retailers (+2.4%), health & personal care stores (+1.7%), food & beverage stores (+0.4%), general merchandise stores (+0.2%) and building materials retailers (+0.2%).
• Annually, US retail sales grew 3.1%, following a downwardly revised 3.9% increase in January.

 

SUMMARY OF SOURCES

• (1) https://www.conference-board.org/topics/consumer-confidence
• (2) https://www.atlantafed.org/-/media/documents/datafiles/research/surveys/business-uncertainty/monthly-report/2025/2025-03.pdf
• (3) https://www.federalreserve.gov/newsevents/pressreleases/monetary20250319a.htm
• (4) https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20250319.htm
• (5) https://www.naiop.org/research-and-publications/space-demand-forecasts/industrial-space-demand-forecast/
• (6) https://www.businessinsider.com/city-metro-population-growth-florida-shrinking-counties-map-2025-3?international=true&r=US&IR=T
• (7) https://www.commercialedge.com/blog/national-office-report/
• (8) https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index
• (9) https://www.chandan.com/post/independent-landlord-rental-performance-report-march-2025
• (10) https://www.census.gov/retail/sales.html

1. PROPOSALS FOR PERMANENT BONUS DEPRECATION

• Discussions are heating up around proposals to extend 100% bonus depreciation deductions on certain business assets as tax-extension negotiations gradually take shape.
• The 2017 Tax Cuts and Jobs Act (TCJA) offered 100% bonus depreciation on items such as machinery and equipment from 2018 through 2022 before declining by 20 percentage points annually in each year since.
• Some advocate for its extension as a lever to grow the economy and create jobs, while reviews of the policy show mixed results.
• Scholarly research on the TCJA-based changes shows that the reforms grew capital investment, particularly in the manufacturing sector.
• The Joint Committee on Taxation (JCT) finds that extending the 100% level through 2025 and making it retroactive back to 2023 would reduce federal revenues by $3 billion over ten years.
• However, an analysis by the Tax Foundation suggests that while restoring 100% bonus depreciation wouldn’t have significant effects on GDP growth in the immediate term, by 2029, it would add an estimated 0.2% to Real GDP.

2. CONSUMER CONFIDENCE FALLS

• US consumer confidence slid in February by its fastest pace since August 2021, based on the latest data from the Conference Board.
• The Conference Board numbers align with recent developments in the University of Michigan’s consumer sentiment measure, which fell to a seven-month low last month. Consumers show increasing concern about buying conditions for goods and threats to their purchasing power.
• Both the present situation index, which measures current assessments of business and labor market conditions, and the expectations index, which looks at the short-term outlook for business and income, declined.
• Notably, the expectations index fell within a ‘potential recession’ threshold of below 80 for the first time since June of last year. Inflation expectations also surged during the month.
• Through the end of January, some inflation expectations indicators appeared steady, such as the NY Fed’s Survey of Consumer Expectations, which showed stable expectations compared to one year before.
• However, the Conference Board data suggests that expectations have unanchored in recent weeks as price pressures resurge and economic uncertainty mounts.
• Some of the culprits may be temporary, such as the rise in egg prices or volatility in energy markets. Therefore, policymakers at the FOMC will be keen to zero in on trends in core inflation expectations to assess potential policy implications.

3. STALLING BUSINESS ACTIVITY

• US business activity in the manufacturing and service sectors fell to a 17-month low in February as uncertainty over tariffs and the federal budget boggs down what had been a post-election boost in business confidence.
• Observing trends in S&P Global’s flash US Composite PMI Output Index, manufacturing and service output fell to an index level of 50.4 in February, its lowest reading since September 2023. A reading above 50 indicates growth, indicating that the sectors barely expanded this month.
• Potentially related to both the drop in the PMI and January’s inflation uptick is consumer activity shifting away from services and back towards goods. The services sector drove much of the decline after contracting for the first time in two years. Meanwhile, manufacturing activity rose to an eight-month high.
• During the initial pandemic recovery in 2020, goods spending drove both consumer spending and inflation pressures, but the pandemic reopening shifted much of this momentum to services, contributing to our sustained period of inflation.
• It’s unclear whether the apparent shift toward goods reflects the temporary effects of consumers trying to get ahead of potential trade restrictions or if we are seeing the impact of falling borrowing costs on producers amid wage and spending stability. There is likely some mix of the two.

4. SURVEY OF HOUSEHOLD EMERGENCY EXPENSES AND DECISION-MAKING

• A quarterly survey by Morning Consult that estimates US households’ confidence in their capacity to absorb emergency expenses found that households grew slightly more confident during Q1 2025 relative to the previous quarter but are less optimistic than one year ago.
• 44% of US adults believe they could cover potential emergency expenses with cash, up from 43% last quarter but down from 47% in Q1 2024.
• The survey replicates the hypothetical approach of the Fed’s annual Survey of Household Economics and Decision-making (SHED) while secondarily measuring real outcomes reported by consumers who have recently experienced emergency expenses.
• Interestingly, the latest findings show that those who encountered an emergency expense between $200-$600 were able to cover those expenses at a higher rate relative to how they responded hypothetically.
• As US consumer confidence statistics drop, surveys that compare confidence levels to real outcomes add an important layer of analysis.
• So far, consumers appear to be faring better than expected, but the Morning Consult survey period spanned from January 22-27, leaving questions about the effects of recent key developments, such as an inflation uptick and stalling business activity.

5. FOMC JANUARY MEETING MINUTES

• The recently released minutes from the January FOMC meeting indicate that policymakers are cautious about the current high level of uncertainty in the economy as they chart their course for monetary policy adjustments.
• The meetings showed that many participants suggested that the committee maintain restrictive policy rates if inflation stays hot amid a largely robust economy.
• Conversely, several officials also indicated an inclination to ease rates if labor market conditions weakened, economic growth slowed, or core inflation returned to 2% more quickly.
• Meeting participants noted upside risks to inflation, such as potential shifts in trade and immigration policies, geopolitical disruptions to supply changes, and stronger-than-expected household spending.

6. DECLINING BUILDER SENTIMENT

• According to data from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, home-builder confidence fell sharply in February, reaching its lowest level in five months.
• According to NAHB Chairman Carl Harris, builders remain hopeful of the prospect of pro-development policies such as regulatory reform, but rising uncertainty is currently dampening expectations for 2025.
• Trade factors again play a role. NAHB points out that 32% of appliances and 30% of softwood lumber comes from imports. The association notably penned a letter to the Trump Administration earlier this month requesting a pause or carve-outs to the proposed tariffs.
• In more positive news, the survey also shows that 26% of builders slashed home prices in February, down from 30% in January and the lowest share since May 2024. However, the average rate of price reduction remains consistently around 5%.

7. HOUSING STARTS DROP

• Housing starts dropped 9.8% month-over-month to an annualized 1.36 million units in January, down from a 10-month high of 1.51 million in December. January’s performance missed market forecasts of 1.4 million annualized units.
• Severe snowstorms and freezing temperatures disrupted construction activity in much of the country, while rising costs of imports and mortgages impeded any potential rebound.
• Single-family home starts declined by 8.4% monthly, while multifamily starts fell by a steeper 11.0%.
• Most regions saw starts fall, occurring most significantly in the northeast, down 27.6% from December. The South fell 23.3%, while the Midwest fell 10.4%.

8. CRE CAP RATES RISE

• According to a recent CRED iQ analysis, cap rates in the CMBS shifted towards the end of 2024, with several property types rising on a quarter-over-quarter basis in Q4.
• Office cap rates averaged 7.40% in Q4, up from 7.16% in Q3. Multifamily rates sat at 5.90% on average, slightly increasing from the 5.77% average in the prior quarter.
• Meanwhile, retail sector cap rates averaged 6.70%, up from 6.45% in Q3, while Industrial cap rates averaged 6.40%, up from 6.24%. Smaller property types were mixed, with self-storage cap rates climbing from an average of 5.86% in Q3 to 6.20% in Q4, while hotels fell from an average of 7.80% to 7.30%.
• With valuations trending in an overall positive direction, the uptick in cap rates reflects some upward movement in operating incomes across key sectors.

9. IMPACT OF FEDERAL WORKFORCE CUTS

• Recent cuts to the federal workforce could significantly impact local commerce and commercial real estate in the Washington D.C. area, as explored in a recent analysis by Globe Street.
• Increased layoffs in and around D.C. have largely not shown up yet in unemployment claims data. Roughly 9,500 full-time federal workers and 200,000 probationary workers were laid off on the day before the most recent reporting period began, but initial claims rose just 5,000 above the previous week’s level.
• However, initial claims figures are seasonally adjusted and may understate the impact of the federal layoffs. Globe Street found that non-adjusted data actually showed a 4.8% week-over-week decrease in initial claims, but the decline was more tepid than the 6.6% projected by seasonal factors, suggesting layoffs are higher than typical for this time of year.
• Some economists suggest the layoffs could have far-reaching effects, potentially dampening local consumer activity and housing demand while decreasing revenues from national firms that provide or rely on federal services.

10. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• According to the Chandan Economics-Rent Redi Independent Landlord Rental Performance Report, on-time payments to independently operated rental units declined in February, falling by 16 basis points from January to 85.2%.
• Conversely, the forecasted full-time payment rate for February, which estimates the effect of late payments that will be received throughout the month, rose for the first time since October.
• Western states continue to experience the highest on-time payment rates nationwide, led by Ohio, Utah, Colorado, New Mexico, and Alaska.
• 2-4 family rental properties and single-family rentals hold the highest on-time payment rates, each at 85.7%

 

SUMMARY OF SOURCES

• (1) https://taxfoundation.org/blog/permanent-bonus-depreciation-expensing-options/
• https://bipartisanpolicy.org/explainer/the-2025-tax-debate-cost-recovery-provisions-in-tcja/
• (2) https://www.conference-board.org/topics/consumer-confidence
• (3) https://www.pmi.spglobal.com/Public/Home/PressRelease/c3a10cc3461d4d8aa1758082292e7358
• (4) https://pro.morningconsult.com/trackers/household-emergency-expenses-survey
• (5) https://www.federalreserve.gov/monetarypolicy/fomcminutes20250129.htm
• (6) https://www.nahb.org/news-and-economics/press-releases/2025/02/builder-confidence-falls-on-tariff-and-housing-cost-concerns
• (7) https://www.census.gov/construction/nrc/pdf/newresconst.pdf
• (8) https://cred-iq.com/blog/2025/02/21/cap-rate-trends-are-steadily-increasing/
• (9) https://www.globest.com/2025/02/21/federal-workforce-cuts-could-impact-millions-beyond-government-sector/
• (10) https://www.chandan.com/post/independent-landlord-rental-performance-report-february-2025

 

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