By Michael Gerrity | February 16, 2022
According to global property consultant CBRE, the total U.S. commercial real estate investment volume of $296 billion in Q4 2021 brought the full-year total to $746 billion, both record levels.
CBRE reports that multifamily led all sectors for investment volume in Q4 ($136 billion) and for the year ($315 billion).
Although Los Angeles and New York had the highest levels of investment in 2021, Sun Belt markets had the strongest year-over-year growth rates, including Las Vegas (232%), Houston (191%), and South Florida (179%).
Private buyers accounted for the most Q4 investment volume ($143 billion), while REITs/public companies had the highest year-over-year growth rate of 153% to $35 billion.
CBRE further reports that cross-border investment in the U.S. increased by 115% year-over-year to $29 billion in Q4. Foreign capital accounted for $56 billion or 7.5% of the total investment volume in 2021.
Canada was the largest source of foreign capital in 2021 with $21 billion, followed by Singapore with $15 billion.
Originally posted on WorldPropertyJournal
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by: HUDSONPOINT Team | October 31, 2021
Delaware Statutory Trusts (DST) provides real estate investors with one of the most efficient ways of obtaining tax-efficient, fractional ownership interest in commercial real estate. A DST is similar to a limited partnership in that a group of investors (otherwise known as partners or beneficiaries) acting as minority owners contribute capital and resources to the trust, where the master partner (or sponsor) then manages the assets and holdings that the trust owns.
A DST can hold title to multiple properties in several locations at once, similar to a REIT (Real Estate Investment Trust). In return for their capital and resources, the minority owners receive limited liability, a pro-rata share of income and cash distributions, and access to commercial real estate investments for which they may otherwise lack the capital.
The use of the DST for commercial real estate investors grew in popularity in 2004, after the IRS ruled that ownership interests in a DST qualify for the tax benefits granted by a 1031 exchange, or “like-kind” exchange, a tool that allows real estate sellers to defer capital gains tax by rolling proceeds from one real estate investment directly into another within a set timeframe.
DSTs incentivize the growth of real estate wealth not only through the passive, hands-off nature of their investments but through their tax benefits, low costs of ownership, and diversification potential.
DST investors can invest in just about every type of commercial real estate property, including multi-family housing, industrial real estate, retail buildings, office spaces, and even specialty property types such as medical offices and self-storage units.
An individual investor who owns a single-family home leases it out, and manages it entirely by themselves may see similar or greater returns from the commercial real estate investments offered by DSTs minus the woes of property management and other components of hands-on investing.
The 1031 exchange has historically been a popular way for individual real estate investors to defer and recapture capital gains tax by reinvesting the proceeds from one sale into another.
The 1031 exchange was originally introduced as part of The Revenue Act of 1921 under Section 202(c); after multiple revisions, in 1954, an amendment to the Federal Tax Code changed the section applicable to tax-deferred, like-kind exchanges to Section 1031 of the Internal Revenue Code.
Now, since their 2004 ruling, the IRS allows DST investors to claim the same tax benefits granted to individual investors using 1031 for a sale and, as a result, preserve all of the sale’s equity. These benefits apply as long as the proceeds from the sale of a relinquished property are reinvested into a “like-kind” replacement property of equal or greater value within 180 days of the relinquished property’s closing date.
Unlike other ownership structures like the tenant-in-common (TIC) agreement, investors in DSTs are not required to maintain any type of individual legal structure on their own. The State of Delaware does not charge any type of ongoing fee for the creation and management of a DST either, and investment minimums can run as low as $100,000 for 1031 exchange investors and $25,000 for cash investors.
It’s also more difficult for investors in a tenant-in-common agreement to obtain financing from lenders since each co-owner in the agreement is also a co-borrower. The sheer amount of paperwork involved in acquiring these loans often turns lenders away from TICs.
This is not the case, however, with DSTs. They’re financed with non-recourse debt and their investors, given their purely passive relationship with the trust, are not responsible for any liability on loans. All debt liability falls on the shoulders of the DST’s
sponsor.
Delaware Statutory Trusts give access to commercial real estate investments for which most individual investors would otherwise lack the capital. Combining that with the fact that the investors themselves don’t actually have to do any of the property scouting and securing work makes portfolio diversification even easier for DST investors.
The rental income that DST properties generate is distributed directly to the investors’ bank accounts on a monthly basis, and investors can expect anywhere between a 5% and 9% cash-on-cash monthly rate of return.
Despite their benefits, DSTs face illiquidity due to real estate being their primary underlying asset with long-term hold periods of 5 to 10 years. DSTs are also vulnerable to macroeconomic trends, such as rising interest rates and periods of recession, that tend to put downward pressure on earnings.
The IRS puts a great deal of strain on DSTs in the form of regulatory constraints; for example, to benefit from a 1031 exchange, you need to plan several months in advance to ensure compliance with IRS guidelines, and a single mishap can halt the entire process.
Despite their benefits, DSTs face illiquidity due to real estate being their primary underlying asset with long-term hold periods of 5 to 10 years. DSTs are also vulnerable to macroeconomic trends, such as rising interest rates and periods of recession, that tend to put downward pressure on earnings.
The IRS puts a great deal of strain on DSTs in the form of regulatory constraints; for example, to benefit from a 1031 exchange, you need to plan several months in advance to ensure compliance with IRS guidelines, and a single mishap can halt the entire process.
Similar to commercial real estate investments in and of themselves, Delaware Statutory Trusts are sensitive to the debt cycles of the economy and how much it costs to borrow money. Investors should stay informed on monetary policy and monitor moves made by the Federal Reserve to keep a healthy track of their investments, no matter how passive.
Remember that no debt liability falls on the shoulders of the trust’s beneficiaries, so at the very least, minority owners don’t have to worry about making loan payments in spite of poor investment property performance.
The tax laws and regulations that govern DSTs top the list of debate topics adored by Congress. Combine this with the fact that DST transactions often involve many moving parts and you have a sales process that halts at the first sign of weakness, delaying cash flow and successful completion of the exchange.
If your DST has investments in other states outside of Delaware, you’ll have to file a state income tax return with each state wherein your trust has investments, increasing expenses on your part as your CPA takes time to prepare and file each one.
While the costs of ownership for a DST are lower than other ownership structures, some of the upfront transaction fees you’ll encounter as an investor in a DST are atypical. These include:
These aren’t the only types of fees you may encounter as an investor in a DST, but they’re some of the most common.
As with any investment, there are risks involved in a DST. Risks such as mismanagement of the portfolio, poor use of leverage/capital, and a collapse of the portfolio. Understanding these risks and performing your own due diligence prior to investing in a DST can minimize these risks.
Originally posted on HudsonPoint
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By FNRP Editor | February 9th, 2022
The goal of every commercial real estate investment is the same, to earn a return on invested capital. Typically, this is achieved by purchasing an investment property at a good price, earning a stream of income over a defined holding period, and then (hopefully) selling the property for more than the purchase price. In order for the property to sell for more than the purchase price, it must experience price appreciation.
In this article, we are going to explore the relationship between a rental property’s cap rate and price appreciation. To do so, we will define what a cap rate is, describe how it is calculated, and identify how changes in it contribute to price appreciation. By the end, readers will be able to use this knowledge to evaluate the appreciation potential with commercial real estate investment opportunities.
In order to understand the relationship between cap rates and price appreciation, it makes sense to start by defining exactly what a cap rate is.
In commercial real estate investment, a property’s cap rate is a performance metric that describes the relationship between its net operating income (NOI) and its market value. The cap rate formula is:
Cap Rate = Net Operating Income / Property Value
In this equation, NOI is calculated as a property’s gross income minus operating expenses, and property value is derived from the purchase price, estimate, or appraisal. The result is a percentage that provides real estate investors with two key pieces of information:
Because the cap rate measures risk and return, there is a direct relationship between it and how much the price of a property appreciates.
The concept of commercial real estate appreciation is a simple one. It means that the value of the property rises over the course of the holding period. It can be measured over different time intervals but is most commonly measured as the change between the purchase price and the sales price. For example, if a property is purchased for $100,000 and sold for $125,000, it “appreciated” in value by $25,000.
Generally, there are three ways that a property can experience price appreciation: through cap rate changes, through efficient management practices, or both.
When evaluating a property’s market, real estate investors are well served to choose one whose conditions are favorable for “cap rate compression.” In this scenario, market factors – like supply, demand, population growth, and rental rates – converge to convince investors that it is worthwhile to pay higher prices for a property, which is reflected in a lower cap rate.
For example, assume that a property with $100,000 in NOI was purchased at a 7% cap rate or $1.42MM. Also assume that five years after purchase, demand in the market has risen significantly. Population and job growth is high and investors are clamoring for properties. As a result, cap rates have fallen to 6%. Assuming the property has the same $100,000 in NOI, the new value at a 6% cap rate is $1.66M. In this scenario, market dynamics have driven cap rates lower and caused $240M in price appreciation.
Now assume that the same property with $100,000 in NOI was purchased at a 7% cap rate or $1.42MM. But, over the course of five years, the property owner has managed expenses, renegotiated some lease rates, and developed new streams of ancillary income. As a result, NOI has increased $125,000. Assuming the cap rate stays the same, the new value is $1.78MM, which is $360,000 higher than the purchase price.
The above examples are for illustrative purposes only. In reality, both NOI and the cap rate change over the term of the holding period. In an ideal real estate investing scenario, market forces drive cap rates lower, and efficient management practices drive NOI higher.
If a property with $100,000 in NOI is purchased at a 7% cap rate, the price is $1.42MM. Now, assume that NOI rises to $125,000 and cap rates fall to 6%. The new value is $2.08MM, which is $660M higher than the purchaser’s price. This is the scenario that offers the highest price appreciation potential/return on investment. It is also the one that real estate investors are after when they acquire a property.
A property’s capitalization rate is a performance metric that describes the relationship between its net operating income and its value.
The result of the cap rate calculation provides real estate investors with an idea of their potential annual return if the property was purchased with cash. In addition, it gives them an idea of the market’s assessment of the property’s risk level.
There is a direct relationship between a property’s level of price appreciation and its cap rate. When market dynamics are strong, cap rates are pushed lower, which causes the valuation to rise. Conversely, if market conditions are poor, cap rates rise and the value of the property is pushed lower.
The other way a property can appreciate in value, assuming the cap rate remains the same, is to increase the amount of net operating income that a property produces. Typically, this is accomplished through efficient management practices.
In an ideal scenario, market conditions drive cap rates down at the same time that efficient property management drives net operating income up. This is where the greatest price appreciation is achieved.
Originally posted on FirstNationalRealtyPartners
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by Eric Stewart |
For years, I’ve been saying that one of the best reasons to invest in commercial real estate is its incredible tax benefits. For investors and landlords alike who want their money-making work while they enjoy life with all those extra income checks coming from owning property on behalf of others; there really isn’t anything better than finding new ways how we can maximize our earnings by taking advantage of every aspect possible regarding what type(s) of space will give us sweetest return!
Commercial real estate investors get more than just a good deal from their investments. They can also take advantage of tax breaks that no other type of investing offers!
Let’s take a look at these benefits now!
Commercial real estate can be one of the only assets on earth that pays you as it ages and degrades! You may have heard about how commercial properties often generate more income than most people spend on rent, but did you know there’s a good chance this will continue to happen even when interest payments are taken into account? Don’t let your mortgage payment go towards someone else’s profit—write those off instead.
You’ll also come out ahead if they pay legal fees or marketing expenses since these represent costs borne solely by landlords without any benefit from their investment beyond keeping up appearances (and maybe inadvertently creating some).
Commercial buildings begin depreciating the minute you acquire them. The asset may not be “physically” decreasing in value but make no mistake: every day, it gets older and thus less valuable
As properties wear out over time (and thanks to depreciation), owners can deduct certain amounts from their taxes each year before applying any income against what was originally earned; this is called “depreciation expense.”
On an expenses list, depreciation is the process of claiming less for each expense as time goes on. This means that you can walk away with more after taxes since it’s not actually coming out of your pocket! So if you own your building, there is no better time than now to make sure that all possible tax benefits have been taken advantage of before preparing any financial statements!
If you’re in the real estate business and have been running your company for profit this past year then there might be some good news! The new Tax Cuts And Jobs Act allows businesses to take up an additional 20% tax break by claiming Qualified Business Income (QBI).
This means that as long as they meet certain requirements such as being sole proprietor or owned solely through one member LLC – these entrepreneurs can now deduct their profits from salaries paid out. So commercial real estate investors may now benefit from the benefits of pass-through taxation-which includes being able to take advantage of this very incentive!
The depreciation and interest expense deductions help lower the income tax burden, but they can’t be written off against capital gains. However, there’s an option for real estate investors: 1031 exchanges! This means that when you sell your commercial property – instead of reinvesting in another one through a simple sale agreement with no strings attached-you get cashback (or put it towards something else).
The catch? You have to work alongside this qualified intermediary who will hold onto all profits from each transaction while helping facilitate deals among different parties interested at various levels.
But the beauty about investing through a 1031 exchange is that you get to use your capital gain as an investment opportunity. Since taxes on those profits won’t be incurred, there will always be more money for future purchases!
Originally posted on LinkedIn
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BY GREG CORNFIELD FEBRUARY 15, 2022
The multifamily sector led the fourth quarter with $136 billion, and for the year with $315 billion.
Business isn’t just back, it’s booming like never before.
A record-high $746 billion was invested in commercial real estate in the United States in 2021, including an incredible $296 billion in the fourth quarter, which is also a record over three months, according to a new report from CBRE.
Those measures show an 86 percent increase over the previous year, when the pandemic hit, and a 90 percent increase over the fourth quarter of 2020, respectively. For comparison, CBRE estimated that total U.S. investment for all of 2019, before the pandemic, was $573 billion, and the fourth quarter that year accounted for $173 billion.
The multifamily sector led the way in the fourth quarter with $136 billion, and for the year with $315 billion, according to the report. With persistent supply chain issues and an ever-growing e-commerce sector, industrial real estate took in the second-most investment in the fourth quarter with $64 billion, up 55 percent year over year. Office investment also surged in 2021 compared to the year prior, up 73 percent to $50 billion, as a significant portion of workers returned to the office in some fashion last year.
CBRE also noted that private buyers accounted for the largest share of investment volume in the final quarter last year with $143 billion, for nearly one-fifth of the total. And real estate investment trusts and public companies traded $35 billion.
Among individual markets, Greater Los Angeles led 2021 for investment volume with $58 billion, which was 83 percent higher than in 2020, and it was 18 percent higher than in 2019. L.A. was followed by New York with $49 billion in 2021, and Dallas with $41 billion, according to CBRE.
Meanwhile, among regions, the Sun Belt markets showed the strongest year-over-year growth rates. Las Vegas investment jumped 232 percent since casinos were shut down in 2020. Houston jumped 191 percent, which was the largest increase among the top 20 markets, and South Florida increased by 179 percent. South Florida also saw a 228 percent increase in office investment with $5.2 billion and a 240 percent jump in multifamily with $13.1 billion.
The Washington, D.C., region saw the 10th-highest investment, for a 52 percent increase over 2020.
Overseas investors brought in 115 percent more in the fourth quarter of 2021 than the same period in 2020. Foreign capital accounted for $56 billion, or 7.5 percent of total investment volume in 2021. Canada was the largest source of foreign capital in 2021 with $21 billion, followed by Singapore with $15 billion. The mix is starkly different from when China led the list by a wide margin some years ago.
Originally posted on CommercialObserver
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By Michael Gerrity | January 28, 2022
U.S. warehouse leasing activity in 2021 breaks all-time record
According to a new report by CBRE, the U.S. industrial & logistics market hit new highs for leasing activity in 2021, recording more than 1 billion sq. ft. of transactions.
That 1 billion sq. ft. is the largest annual gross amount recorded since CBRE started tracking the figures in 1989. Last year’s surging activity drove vacancy down to 3.2%, the lowest on record. With space incredibly tight, asking rental rates shot to $9.10, up 11% year-over-year and a new high.
“We anticipated that last year would set a record, but this level of activity is extraordinary,” said John Morris, executive managing director and Industrial & Logistics Leader for CBRE. “As retailers require more safety stock and e-commerce continues to expand, more space is needed. All signs point to the same demand continuing in 2022.”
On a net basis, the market registered positive absorption of 432 million square feet, an 81 percent increase from 2020 totals. Last year’s net absorption outpaced the previous record in 2016 by 50 million sq. ft. Net absorption measures total leasing activity – that 1 billion sq. ft. – against the amount of space newly vacated in that period.
The construction pipeline is robust, with a record 513.9 million sq. ft. of projects under construction at year end, 200 million sq. ft. higher than this time last year. However, construction completions were down 10.3 percent year-over-year as supply chain issues have hampered the construction timeline for many projects due to a scarcity of materials.
“We will need to see significant construction completions this year to accommodate all of this activity,” said Morris. “Developers will likely take on more construction and materials costs to keep pace with demand, but space will remain very tight and rents will likely continue to rise at considerable rates.”
Originally posted on WorldPropertyJournal
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By Rainer
It’s essential to understand various forms of ownership and how they affect your financial situation before investing. Most people seem familiar with the most common form of taking real estate title, which is fee simple ownership. However, it’s worth noting that there are other forms of ownership such as leasehold ownership and ground lease ownership.
The three types of land ownership are very different from each other from a value perspective. Therefore, it is necessary to understand each of them in-depth, especially if you wish to become a real estate investor. Here are some basics to help you understand the pros and cons of the three.
Mainly it’s the most common form of ownership whereby buyers gain full possession of the property after purchase. It gives you total dominance over the buildings on the property, ponds, roads, and other machinery available. Further, you own right to the minerals under the surface and air above.
Additionally, it gives you the freedom to do whatever you wish with your property. As a legal owner, you can dispose of it when needed and make improvements based on your preferences. You hold the property in perpetuity, and you can sell, lease, trade, or give it away as inheritance upon death.
Nobody can take the real estate form from a fee simple owner aside from a few exceptions. With this form of ownership, you won’t have to pay any rents, only some property taxes, and maintenance fees. Thus, most people prefer to purchase property in the fee simple ownership form.
In fee simple ownership, you own the land on the ground along with the building sitting on top of the land. Since you also own the building improvements, you can take advantage of real estate tax depreciation.
In a leasehold, you can enjoy the exclusive use and possession of a property for a specified period. For instance, as a fee simple property owner, you can give another individual the right to occupy your land for a specific time at a price. Please note that although leasehold property may seem less pricey than simple fee properties, you might face some stringent financing requirements with leasehold ownership.
Under leasehold ownership, as a leaseholder, you purchase the building and structures at the specified period, but you have no right over the land beneath (aka you don’t own the dirt/ground below your building). You might own the freedom for improvements on the property, but when the agreed-upon time runs out, the premises returns to the owner.
In leasehold ownership, you own the building/structural improvements above the ground. You do not own the dirt/land below. Since you only own the building improvements above ground, you can take advantage of real estate tax depreciation.
An owner of leasehold property needs to pay the required rent in full to the owner of the land/dirt below. Further, you will only use the premises up to the years indicated in the lease agreement. Additionally, the lease rents may face adjustments, probably every 10 to 15 years. The new rent depends on the current land market value. If it increases over time, then you will inevitably pay more rent.
It’s worth noting that if you transfer the leasehold property to a new user, the individual can only use the premises for the remaining period outlined in the original lease. For instance, buyer A purchases a leasehold property with 50 years remaining on the base lease term. He then decides to sell the interest to buyer B 10 years later. Buyer B’s terms on the premises stand at 40 years remaining on the base term.
Ground Lease ownership is when you own the land (aka the dirt/ground below the building). The tenant (aka lessee) will be responsible for the building and structural improvements above your land.
Explain like I’m five years old (ELI5): Imagine a birthday cake with two layers. The bottom half is the “ground lease” layer. The top half is the “leasehold” layer. All together, the entire cake makes up “fee simple” ownership.
If you only own the bottom, you have a “ground lease.” If you own the top, you have a “leasehold.” If you own the whole thing, you have a “fee simple.”
Now that you know the three main types of land ownership for commercial real estate investors, you need to keep several considerations in mind. Make sure to review the time left on the lease agreement and the required amount of rent payable to the lessor. Also, confirm the leased fee interest and the terms of reversion outlined.
Further, you may want to determine whether there is a provision to extend the lease term or resell it. Remember to check the lease rent renegotiation dates and other fixed periods to help make an informed choice.
The decision to go for either of these land ownership types depends on personal preferences and the premises’ purpose. The main difference between the three is that you need to pay rent to the original owner in leasehold interest. In contrast, you own the premises for fee simple and ground lease properties, and you may enjoy some income if you choose to rent it out.
To make the right choices, please determine how much time you plan to use the property. The fee simple ownership works best for individuals who seek permanent ownership and full property control. Also, it’s an excellent alternative if you wish to enjoy full ownership rights with minimal restrictions. Besides, you may consider this form of ownership if you want to leave property to your heirs, or use it as collateral for financing in the future.
The leasehold ownership will suit you best if you wish to have the benefits of use at a fraction of the property market value. You will only pay for lease rent that is much less than the mortgage price of the entire property including land. Still, you can consider this type of ownership if you have no heirs, are only looking for short-term ownership, or in dire need of property depreciation benefits.
As you can see, the main differences in these three forms of property ownership are diverse and can significantly affect your real estate value. Understanding these land ownership forms will help you avoid the possibility of a successful exit, improper sales, or prevent other undisclosed property issues in the future. The above piece outlines apparent differences between fee simple, leasehold, and ground lease ownership so that you can select depending on your current position. Remember that the fee simple is the most pre-eminent form of ownership that grants you full control over the premises. On the contrary, the leasehold and ground lease offers you ownership at lower costs but with more restrictions. Here is a book that I highly recommend all investors and brokers to read in regards to mastering the different types of leases.
Originally posted on NNNDigitalNomadInc.
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By Ted Knutson | February 04, 2022
Headwinds are likely to moderate expansion for 2022.
Commercial real estate had a banner year in the Americas but headwinds are likely to moderate expansion for 2022, says a new report from CBRE.
“Another year of investment growth is expected in 2022, albeit at a more moderate pace than in 2021,” said Richard Barkham, Global Chief Economist for CBRE. “Continued economic growth and low-interest rates will fuel investment activity. Headwinds, such as rising inflation, geopolitical tensions, and the potential for a COVID-19 resurgence, may cause some jitters in Q1 2022.”
CBRE estimates that annual global investment volume will increase by roughly 8% in 2022, Barkham added.
This reflects a similar assessment the National Association of Realtors made in January when it said that commercial real estate can be expected to perform well this year despite the prospect of higher interest rates.
Annual investment volume surged 86% to nearly $776 billion in the Americas with the fourth quarter record having a volume of $305 billion, up by 90%, CBRE said.
The fourth-quarter increase, CBRE said, was fueled by 116% growth in multifamily investment volume as Sun Belt markets continued to see robust growth, while gateway markets began to recover—particularly in high-quality office assets.
The multifamily sector’s share of total investment grew to 45% in Q4 2021, up from 41% in Q3 2021 and above its 2015-2019 of 28%, driven primarily by Sun Belt markets with gateway markets such as San Francisco, Los Angeles, and Chicago all had year-over-year growth of more than 110%.
In the fourth quarter, the industrial sector accounted for 22% of total investment volume on par with growth in the previous two quarters but down from its pandemic-era high of 27% the same quarter a year earlier.
Industrial investment increased 55% year-over-year to $64 billion in the last quarter of 2021 with full-year investment in the sector increasing by 53% year-over-year to $160 billion.
Retail investment increased by 119% year-over-year to $34 billion in Q4 2021, accounting for 11% of total investment volume in the period, its highest share since Q2 2020.
The full-year increase for retail was up 84% to a total of $74 billion.
The office sector saw its share of total investment falling to 17%. At the same time, the office market captured its highest quarterly volume of $120 billion since Q4 2018—an increase of 73% from Q4 2020 and 19% from Q4 2019.
Full-year 2021 office investment volume rose by 55% from 2020 to US$136 billion—just 5% shy of 2019’s total.
Hotel investment showed particular strength, rising 142% year-over-year in Q4 2021 to $12 billion, helping to take a full-year volume to $43 billion, a 238% increase from 2020.
Originally posted on GlobeSt
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SUMMARY OF SOURCES
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advance-estimate#:~:text=Gross%20domestic%20product%20(GDP)%2C,services%20used%20
up%20in%20production
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SUMMARY OF SOURCES
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• (9) https://www.banking.senate.gov/hearings/01/04/2022/nomination-hearing
• (9) https://www.bloomberg.com/news/articles/2021-12-28/fed-s-incoming-voters-skew-hawkishbiden-picks-may-tilt-balance
• (10) https://www.bloomberg.com/news/articles/2022-01-11/world-bank-cuts-2022-global-growthforecast-on-virus-flare-ups?srnd=economics-vp