SVN Research | State of the Market Report | Retail 2023

NATIONAL OVERVIEW

After benefiting from a pandemic-era boost in spending and consumption, retail sector fundamentals began to waiver during the second half of 2022. Investors inched into 2023 cautiously, but several critical retail growth metrics have continued to trend positively early this year.

Above all, consumer spending continues to defy the damnation of inflation. According to the Bureau of Economic Analysis, personal outlays increased by $312.5 billion in January, growing by 1.8% from December and 8.4% over the last 12 months. As consumption normalizes from sky-high 2021 growth levels, it’s been tempting to view the reversion as an impending headwind for retail. Yet, if inflation’s downtrend continues without significant pain to labor markets, today’s expenditure levels may represent a new equilibrium for consumer spending.

Since monetary policy tightening began in March 2022, consumer spending has grown at an average of 8.4% year-over-year, well above the 4.2% average rate reached during the Fed’s last tightening cycle before the pandemic. Further, during the previous cycle, consumption growth did not substantially slow until COVID-19 hit US shores, and subsequent shutdowns, layoffs, and reduced spending ensued.

Overall, the retail sector continues to go through a reorganization process. At its core, retail real estate is valued by its ability to put goods and services in the hands of consumers. That requires not only a willingness to spend from consumers — but also a preference for how they interact with goods, brands, and services across a digital-physical divide. Increasingly, online retailing has become an incubator of sorts, where successful brands will mature into brick-and-mortar as part of a second-stage expansion. While the US remains over-retailed and the market correction is ongoing, new models of success are emerging. It is not to say that momentum has (or will) suddenly rush in for retail. Still, more and more, it looks like the retail sector’s worst days are in the rearview.

Financials

TRANSACTION VOLUME

According to MSCI Real Capital analytics, retail transaction volume totaled $86.8 billion in 2022 — increasing 5.6% from the previous year. Retail was the only one of the “core four” commercial property types to see an increase last year.

Often, structural forces are more impactful than cyclical ones. The retail sector was already experiencing a secular reorganization when the pandemic hit. Then, the exogenous shock of the shutdown and protracted period of social distancing hyper-accelerated the retail sector’s shakeout. While the process was painful, the sector is starting to see the light on the other side. A combination of the sector having less rightsizing left to do, and retailers experimenting with new hybrid models that blend e-commerce with brick-and-mortar, is fueling optimism for the sector ahead — leading to more investment. Last year marked the first time that retail investment volumes increased in consecutive years since 2015.

CAP RATES AND PRICES

Cap rates in the retail sector followed the trend observed throughout the rest of the commercial real estate ecosystem. As capital sought deals ahead of the Fed’s widely anticipated monetary tightening, cap rates sank to new all-time lows. For retail properties, cap rates reached their low point in Q2, touching down to 6.0%. While cap rates then started picking up in Q3 and Q4, the movements were mild compared to other property types. By the end of the year, cap rates had risen to 6.2%, though they only moved by a total of 13 basis points off their Q2 nadir.

With retail cap rates starting to inch higher, the wind in the sails of pricing has died down. Prices kept on rising through the first three quarters of the year, reaching a new all-time high of $300/sq ft in Q3.

However, reflecting the impact of higher interest rates, pricing started to soften, with retail asset valuations declining to $287/sqft. While prices remain up by 1.6% year-over-year, the drop from the previous quarter was a more substantial — 4.3% — the most significant quarter-over-quarter decrease since 2009.

Regional Performance

In developing the regional retail rankings, the SVN Research Team utilized a scoring matrix. The matrix offers a comprehensive view of how regional markets are performing within the context of growth from a year earlier, as well as compared to before the pandemic. The eight following criteria were included in the matrix:

Transaction Volume: 1-Year % Change
Transaction Volume: % Change Over Pre-Pandemic (2019)
Share of US Transaction Activity: 1-Year Change
Share of US Transaction Activity: Change Since Pre-Pandemic
Cap Rates: 1-Year Change
Cap Rates: Change Since Pre-Pandemic
Pricing: 1-Year % Change
Pricing: % Change Over Pre-Pandemic

TOP PERFORMERS: SOUTHEAST

Shockingly, it turns out that attracting many new residents (who also happen to be consumers) into your region is a good thing for retail, too. The Southeast, a hotspot destination for young, starting-out families priced out of affordable housing options in high-cost markets, has seen broad commercial real estate success.
Over the past three years, retail asset prices have soared in the Southeast by 27.9% — blowing past every other corner of the country. The pricing increase comes with more investment dollars targeting retail assets.

All regions saw a rise in retail investment volume between 2019 and 2022. However, these growth rates sat between 6% and 33% for all areas other than the Southeast. Meanwhile, growth in the Southeast lapped the rest of the playing field, jumping by an incredible 75.8% in that time.

TOP PERFORMERS: WEST

How could the region that boasts Rodeo Drive not pop up here? Anchored by metros such as Los Angeles, San Francisco, Las Vegas, and Salt Lake City, the West has a unique balance of legacy gateway markets and high-growth markets that are starting to show their economic might. No region saw a bigger relative or absolute increase in investment volume than the West.

A total of $22.8 worth of retail assets changed hands in the West last year — $3.9 billion more than in 2021, representing a 20.6% increase. Moreover, after briefly losing its crown as the most active retail investment region in 2021 to the Southeast, the West narrowly recaptured its title in 2022 — securing 26.1% of all retail sales compared to the Southeast’s 26.0%.

We are ready to assist investors with Santa Ana Retail Property For Lease/Sale. For questions about Retail Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

1. Q1 2023 GDP

The US economy grew at an annualized rate of 1.1% during the first quarter of this year, slowing significantly from the Q4 2022 annualized rate of 2.6% and registering well below the Dow Jones consensus forecast of 2.0%.
Growth in Q1 primarily reflected an increase in consumer spending partially offset by a decrease in private inventory investment.
The increase in consumer spending was aided by increases in both goods and services spending. Spending on motor vehicles and parts led to goods consumption, while an increase in health care and food services spending carried much of the rise in services.
Government spending increased during Q1. On the federal level, the increase primarily reflected nondefense expenditures, while on the state and local level reflected a rise in compensation for government employees.
A pullback in Wholesale Trade growth led to a decrease in private inventory investment, specifically within machinery, equipment, and supplies. Manufacturing also saw a retreat.
A decline in residential fixed investment was led by a decrease in new single-family home construction.

2. NMHC QUARTERLY SURVEY OF APARTMENT CONDITIONS

As of the NMHC’s April 2023 survey, apartment investors across the US continue to report a challenging financing environment, with the availability of both debt and equity continuing to shrink.
A majority (51%) of apartment operators report that conditions in their local markets are looser (higher vacancies, less rent growth) today than three months earlier. 34% of operators said conditions were unchanged compared to three months again, while just 14% reported a tightening.
While the majority of investors (53%) report that now is a worse time for borrowers than three months ago, this share has started to drop off over the past two quarters. When asked in October 2022, a supermajority (90%) felt that borrowing conditions had worsened, and 0% reported an improvement. Fast forward to the April 2023 survey, this declining share has dropped by 37%, while 12% now say financing conditions are improving.
Notably, while a majority of investors (64%) anticipate a continued bumpy landing thanks to the Federal Reserve’s monetary tightening cycle, they do not anticipate a recession. Just 21% of respondents expect a hard landing with a recession.

3. CONSUMER CONFIDENCE

According to data from the Conference Board, consumer confidence fell in April to 101.3, declining from a reading of 104.0 the month before.
The present situation index, a snapshot of current business and labor market conditions, rose from 148.9 to 151.1.
The expectations index, based on the shorter-term sentiment of income, business, and labor market conditions, fell from 74.0 to 68.1 in April. Moreover, outside of a brief uptick in December, the expectations index has been below 80 since February 2022.

4. MORTGAGE APPLICATIONS

Mortgage applications climbed by 3.7% during the week ending on April 21st, 2023, an 8.8% fall in the previous week, according to the Mortgage Bankers Association.
Mortgage application demand fell significantly during the second half of 2022 as mortgage rates rose steeply. After falling for much of December, mortgage applications increased to begin in 2023.
Applications to purchase a home increased by 4.6%, while refinance applications rose by 1.7% during the week ending April 21st.
Despite recession concerns, markets largely expect a 25 basis points hike by the Fed at their next meeting, which has placed upward pressure on treasury and mortgage rates.

5. OFFICE DEMAND

Office demand is on the rise again, according to the latest data from VTS. The VTS Office Demand Index (VODI) rose by 31.3% between March and April.
Historically, the month of March tends to experience a seasonal surge in office demand and occupancy. However, this year’s surge is higher than in the previous five years. Still, since office occupancy remains below pre-COVID levels, similar increases in demand today will have an outsized impact on month-tomonth growth than in previous years.
That said, the VODI remains 4.5% below its March 2022 level, signaling a continuing long-term recession in office demand. However, the gap is narrowing. In February, the VODI was down by 12.5% from a year earlier.

6. MSCI RCA: APARTMENT

Apartment cap rates ticked up again in Q1 2023, rising 19 bps from the previous quarter and settling at 5.0%. Compared to one year ago, apartment cap rates are up by 57 bps.
Trends are similar across sub-asset types within the apartment sector. Both garden-style and mid/ highrise apartments finished Q1 2023 with a 5.0% average cap rate. Moreover, both sub-asset types saw similar quarter-over-quarter changes, with garden and mid/highrise units rising by 17 bps and 18 bps, respectively.
Apartment transaction volume totaled just $25.4 billion in Q1 2023 — the least active quarter on record since Q2 2020. Volumes declined 52% quarter-over-quarter and 64% year-over-year. Valuations have also fallen for their third consecutive quarter, dropping by 9.4% since reaching a peak in Q2 2022.

7. MSCI RCA: RETAIL

For a third consecutive quarter, retail cap rates continued rising in Q1 2023. Retail cap rates sat at an average of 6.4% during Q1, rising 17 bps quarter-over-quarter and 34 bps year-over-year.
Urban storefronts were the only retail sub-type not to see an average quarter-over-quarter cap rate increase, holding at 5.4%. Lifestyle/power centers and single-tenant retail assets also see favorable cap rate trends, posting mild quarter-over-quarter gains while maintaining year-over-year decreases.
Retail transaction volume increased mildly (+0.1%) in Q1 2023, totaling $16.9 billion in sales. Still, the positive gain is noteworthy as other sectors saw a significant pullback last quarter. Measured, year-over year, retail asset sales are down by 27.4%. Moreover, asset valuations have softened by a cumulative 7.6% over the past two quarters.

8. MSCI RCA: OFFICE

The office sector has now seen cap rate increases in the past four quarters. Average office cap rates jumped again in Q1 2023, this time by 17 bps to land at 6.7%. Over the past year, office cap rates have risen, on average, by 54 bps.
Suburban office cap rates have jumped 54 bps in the past year, rising to 6.8% through Q1 2023. Meanwhile, central business district (CBD) office cap rates have risen by a more gradual 32 bps, reaching 5.8%. Notably, CBD office cap rates did not meaningfully compress during 2021 as functional concerns were already impacting pricing.
Office transaction volume cratered in Q1 2023, with just $10.7 billion worth of assets trading hands. Compared to the prior quarter, trading volumes sank 48.1%. Year-over-year, deal volumes fell 68.4%. Similarly, asset valuations continue to feel the heat of higher interest rates, dropping 2.8% quarter-over-quarter and 9.1% year-over-year.

9. MSCI RCA: INDUSTRIAL

Despite strong fundamentals, the industrial sector has proven it is not immune to the effects of higher interest rates. Like the office sector, industrial assets have now seen cap rates rise in the past four quarters. Industrial cap rates have risen 12 bps quarter-over-quarter and 35 bps year-over-year through Q1 2023, landing at 5.5%.
Single-tenant industrial space has seen the most dramatic increase in average cap rates over the past year, rising by 63 bps to 5.7%.
Transaction volume sank to its lowest quarterly amount in Q1 2023 since 2020, falling to $15.5 billion. The Q1 totals stand a decrease of 47.2% quarter-over-quarter and 54.4% year-over-year.

10. CASE-SHILLER HOME PRICE INDEX

According to the S&P Case-Shiller National Home Price Index, negative pricing pressures may be starting to ease in the housing sector.
As of February 2023, for the first time in eight months, home prices did not fall on a month-over-month basis. While the monthly gain was marginal (+0.2%), the directionality is meaningful.
Through the February 2023 data point, average home prices are down from their June 2023 peak by just 2.7%. While higher interest rates have sapped new homebuyer demand, existing homeowners being locked into low mortgage rates has meant a lack of default distress. As a result, while buying activity has fallen off, the impact on pricing has been marginal.

SUMMARY OF SOURCES

(1) https://www.bea.gov/data/gdp/gross-domestic-product
(2) https://www.nmhc.org/research-insight/quarterly-survey/2023/nmhc-quarterly-survey-ofapartment-conditions-april-2023/
(3) https://www.conference-board.org/topics/consumer-confidence
(4) https://www.mba.org/news-and-research/newsroom/news/2023/04/26/mortgage-applicationsincrease-in-latest-mba-weekly-survey
(5) https://view.ceros.com/vts/vts-office-demand-index-april-2023/p/1?utm_medium=email&utm_source=content&utm_campaign=2023-04-26-dta-vodiapril2023report&utm_content=national&mkt_
(6) https://storage.pardot.com/36252/1681929980GgvZJteN/2304_RCACPPI_US.pdf
(7) https://storage.pardot.com/36252/1681929980GgvZJteN/2304_RCACPPI_US.pdf
(8) https://storage.pardot.com/36252/1681929980GgvZJteN/2304_RCACPPI_US.pdf
(9) https://storage.pardot.com/36252/1681929980GgvZJteN/2304_RCACPPI_US.pdf
(10) https://www.spglobal.com/spdji/en/index-family/indicators/sp-corelogic-case-shiller/?utm_content=Intl_Indicators&utm_source=google&utm_medium=next_gen&utm_term=home%20price%20indices&utm_campaign=paid_

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Recognizing the Resilient Appeal and Changing Prices

Triple-net (NNN) leased retail assets have long been a point of entry into the asset class for many inexperienced commercial real estate investors. NNN retail properties are often solitary structures with one or occasionally two retail tenants, and they are typically free and clear of virtually any landlord obligations.

If there is graffiti or a roof leak, the tenant is not calling you, according to Andrew Bogardus, executive director in the net lease group at Cushman & Wakefield. You still receive a check each month while they take care of it themselves.

These assets are especially enticing in low interest rate circumstances when investors find it challenging to obtain meaningful income through other safe investment options, such as government bonds, due to their simplicity.

But what happens to the market for NNN retail properties when interest rates increase and suddenly a Dollar General in rural Louisiana’s 5% cap rate is in direct competition with a similar yield on a six-month Treasury note? And what should investors search for while examining the wide variety of NNN-leased properties on the market?

Bogardus gave LoopNet a brief overview of NNN retail assets’ fundamentals and the present competitive landscape.

What to Look for in a Retail Property with NNN Leases
Bogardus claims that smaller investors interested in NNN retail properties frequently search for a 1031 exchange possibility. They may be selling a property that requires more work, such as “a single-family home they rent out or a four-unit apartment building that they’ve been managing themselves,” and they are seeking to buy a property where they can simply “collect a check” each month.

or “mailbox money,” as Bogardus put it.

There is a NNN retail property for practically every type of investor, from banks to auto chains. Bank branches, quick service (or fast food) restaurants, automotive supply businesses, drug store chains, supermarkets, and discount retailers are some of the most typical types of retail tenants occupying these locations.

Investors that are interested in purchasing one of these assets should consider the property’s general location. Ideally, it should be near retailers that complement it in a high-traffic, high-visibility area. Even among those tenants, there is a hierarchy. Big-name, national shops often attract the most investor interest and are provided at the lowest cap rates. According to Bogardus, trendier and more well-liked customers, like Chick-fil-A or In-N-Out Burger, will command more attention and higher pricing than their less well-liked siblings (like Arby’s or Sonic Drive-In).

The normal length of a lease for a NNN retail property is between 10 and 20 years, with yearly increments. However, investors should be aware of how much time is remaining on the lease because, according to Bogardus, the more time left on the lease, the more desirable the property will typically be.

Who signs the lease is another issue that needs to be addressed., Bogardus asked rhetorically. Investors should be aware of whether their potential property is leased to a corporately owned store or a franchisee, according to Bogardus. Corporate-owned properties are seen as preferred due to their good credit standing.

For NNN retail investors, it is crucial to comprehend the stability of the current tenant because the only obligation building owners have is to lease the property once more in the event that the current tenant vacates the premises.

The Present Retail NNN Lease Property Market
As one might anticipate, the market for NNN lease properties has been significantly impacted by the rise in interest rates, which has increased the yield on a variety of safe investment options.

Since early September [2022], “we’ve seen demand fall off significantly,” Bogardus added. It has moved much more slowly.

According to Bogardus, investors might anticipate getting a loan for a NNN retail property in the region of 3%–3.5% prior to the increase in interest rates. However, the cost of debt has increased significantly and quickly in the current environment, and investors are now looking at interest rates between 5.75% and 6.25%.

Bogardus emphasized that in order to maintain the same cash-on-cash return, the cap rate must increase.

But strangely, cap rates on NNN retail assets have remained unchanged. According to Bogardus, the majority of institutional investors are currently looking for cap rates on these properties between 6% and 6.5%, although sellers are still committed to obtaining cap rates of approximately 5%.

“We have a big disconnect,” Bogardus remarked.

This discrepancy is typical of a situation that has been occurring in the real estate market across asset classes and regions, where sellers have been hesitant to give in to the current interest rate environment and recognize the effect it has had on cap rates.

The effects of that difference may be felt even more sharply in the NNN market because most NNN buyers are more focused on attaining a stable, consistent return than they are on long-term appreciation or potential future upside. The largest threat to profitse an unexpected vacancye still exists, so why incur the risk when a similar return can be obtained through other means? NNN retail buildings unquestionably present owners with fewer hazards than many other real estate investments.

Nevertheless, Bogardus thinks that cap rates will eventually catch up to interest rates. Sellers can determine where they need to be with the cap rate once interest rates stabilize.

Until then, Bogardus emphasized that the 1031 exchange market for buyers of NNN investments is still highly active. They are attempting to purchase a property with a long-term lease and a national tenant in order to delay paying taxes.

Additionally, he noted that the sites inhabited by the more well-known and reliable retailers listed earlier continue to have robust business. The cap rates must increase if the shop, though, “doesn’t have as good of a reputation, or perhaps it’s a franchisee instead of a corporate-owned store.”

Nonetheless, the rise in interest rates is posing problems for both banks and CRE.

It is objectively absurd to be struck in the head by an acorn and believe that the sky is falling, as occurred in the classic folktale. Yet, considering what would happen to CRE lending after two banks fail quickly after one another, particularly in light of the experience of the global financial crisis, isn’t inherently absurd. Nonetheless, it might not be logical.

Although both banking and CRE face challenges from a rapidly rising rate environment, Moody’s Analytics recently stated that when looking at the real cross-exposures of the sectors and structural differences between now and 15 years ago during the Global Financial Crisis (GFC), the conclusions are less sensationalistic and more nuanced than some headlines suggest.

Rising interest rates have already slowed deals and driven valuations lower, the business stated. There will be some CRE loan defaults as refinancing rounds approach. For instance, Veritas Investments, Chetrit Group, Columbia Property Trust, and Brookfield have all missed payments on loans this year. According to M&T Bank, 20% of its office loans are in trouble.

But the details of how these processes might manifest themselves are complicated. For instance, several cite statistics that claim local and regional banks own 70% to 80% of CRE debt. The vulnerability and distribution are more intricate.

However, just 13.8% of the debt on income-producing properties is held by the 135 US regional banks, which are commonly regarded as those with assets between $10 billion and $160 billion, according to Moody’s. The Federal Reserve (Fed), which classifies the top 25 banks as “large,” has 12.1%. 9.6% of the total is held by the 829 community banks (with assets between $1 billion and $10 billion), while the remaining 3.2% is distributed among the 3,726 extremely small neighborhood banks (with assets under $1 billion).

That is to say, the U.S. The CRE debt market is larger and more complex than is typically thought, and major banks as well as a number of non-bank lenders, including mortgage REITs, life insurance companies, and private bridge lenders, may intervene to cover any eventualities.

The distribution of CRE loans among banks was more heterogeneous than was frequently noted, as Marcus & Millichap had recently argued. While acknowledging that some loans would default, John Chang, senior vice president and national director of research and consulting services, said in a business video that most loans wouldn’t.

Yet, there are indications that the stability of banks is continuing. According to Moody’s Analytics, “developments in the Fed’s lending initiatives over the past week have been credit positive and point to likely stabilization.” The total balance sheet of the Fed decreased by $28 billion to $8.76 trillion, and the amount of money the Fed lent to the banking industry fell by $11 billion to $153 billion. The amount of outstanding loans from the Fed’s discount window decreased this week from $110 billion to $88 billion on the asset side of the balance sheet.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

Ashley has been a realtor since 2016, she helps investors identify distressed properties and increase their high returns through property management, leasing and sales. Her top skills are her abilities to identify the client’s needs and create an investment strategy to get the best returns on their investments. She helps her clients leverage their funds within their investment needs and provides value by showing them how their investment dreams can become a reality. She also works with long term owners, strategizing how they can hold their property longer to fit their family goals and to help them maximize the value of their long-term investment strategy.
Ashley leads with value.

Over the course of her career, Ashley has built lasting relationships with her clients. Past clients have said they really felt like Ashley cared about them and their needs. Her top priority is making sure her clients walk away feeling happy about how she handled the deal and pleased with their investments.

Ashley resides in Corona with her husband, two boys, and one daughter. Whether its Friday movie night, family game nights on Saturday, dance recitals, gymnastics and volunteering in her kid’s classroom, she is in high demand from her home life to her business yet she has a way of making you feel like you’re the only one.

Brock Smith is an advisor with SVN Vanguard | Industrial Group. He specializes in advising landlords and tenants in the sale and lease of industrial buildings and land throughout Southern California. Brock has a commercial construction background, specifically in Sales / Project Management for large Design Build projects across the country including hotels, apartments, hospitals, casinos. Prior to joining SVN, he was with Ashwill Associates. Brock is a Loyola Marymount University alum and currently resides in Lake Forest with his wife, two daughters, and dog.

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1. INTEREST RATE IMPACT ON BANK SECURITIES AND CAPITAL

After recent distress in the banking sector, there is a risk that many of the small and mid-sized banks that hold the bulk of US commercial real estate loans may see a credit crunch, dampening liquidity in the sector.
According to Goldman Sachs, roughly 80% of all bank loans for CRE come from regional banks, which are most likely to see a tightening of credit and lending standards following the collapse of Silicon Valley Bank.
CRE fundamentals remain strong relative to the broader US economy. Still, any upcoming refinance activity must factor in higher interest rates and the shifting demand profiles of CRE sectors. This will be of particular concern for low-interest office loans coming due, which will have to contend with higher rates and lower long-term demand.

2. 2023 SCE HOUSING SURVEY

Households are increasingly expecting home price growth and rents to decline over the near term, according to the New York Fed’s latest Survey of Consumer Expectations Housing Survey.
Households expect home prices to grow by 2.6% over the next 12 months, down from 7.0% one year ago. Current forward-looking sentiment, which relies on survey data taken in February, is the lowest since the regional bank started conducting the survey in 2014.
On the other hand, five-year forward expectations rose to 2.8% from 2.2% last year.
Rents are expected to increase by 8.2% over the next 12 months, which is still a robust estimate, but is down from 11.5% last year. Meanwhile, renters place their probability of owning a home in the future at 44.4%, a tick up from the 43.3% registered one year ago.
Respondents expect mortgage rates to rise to 8.4% one year from now and 8.8% in three years.

3. JOBLESS CLAIMS

Initial jobless claims rose higher than expected during the week ending on March 25th, totaling 198,000, which is 7,000 claims above the previous week. Economists forecasted claims to grow to 195,000 during the week.
While the four-week moving average for initial claims have been steadily rising, they remain relatively benign in the face of higher interest rates and slowing economic activity. Specifically, while forward looking unemployment rate projections continue to rise, employers have been slow to lay off workers, a potentially good sign for the labor market as recession fears grow.
Continuing claims, which run on a one-week lag, rose by 4,000 during the week to 1.68 million, slightly below estimates.

4. Q4 GDP FINAL NUMBERS

The Commerce Department slightly revised down its Q4 2022 GDP numbers in its third estimate, released on March 30th. The final metric was marked down to a 2.6% annualized rate, down from the 2.7% previously reported.
According to the report’s analysis, the downward revision primarily reflects downward revisions to exports and consumer spending. Imports were also revised down, which had an upward effect on GDP.
Overall, last quarter’s growth was driven by increases in private inventory investment, consumer spending, non-residential fixed investment, and government spending.
Based on the Atlanta Fed’s GDPNow tracker, growth is estimated to have accelerated during the first three months of 2023. GDPNow currently projects a 3.2% annualized growth rate for the US economy in Q1.

5. MORTGAGE RATES FALL

According to Freddie Mac, mortgage rates fell to their lowest levels in six weeks during the week ending on March 30th. The 30-year fixed rate fell to 6.32%, down ten basis points from one week prior.
After reaching a high of 7% last September, mortgage rates declined to close 2022 and fell as low as 6% in January, prompting an 8% jump in pending home sales that month. Rates began to rise again in mid- February as the market priced some uncertainty around the Fed interest rate policy path. The downtrend follows a cautious 25 basis points rate hike by the Fed, which, combined with recent financial market distress, has many forecasting a pause or reduction in interest rates soon.
Mortgage rates are also declining right as the spring homebuying season begins, which is likely to entice many who have been on the sidelines in recent months back into the market. However, low inventory will remain a challenge and will likely place some upward pressure on home prices if rates continue to trend lower.

6. INDEPENDENT LANDLORD RENTAL PERFORMANCE

The on-time payment rate in independently operated rental units improved by 186 bps between February and March, coming in at 84.9% and reaching a new post-pandemic high, according to the latest Independent Landlord Rental Performance Report by Chandan Economics. March’s full payment rate is forecasted to land at 94.3% — which would also be a new high.
National on-time payment rates have now held above 81% for six consecutive months — a first in the life of the Chandan Economics-RentRedi tracking.
Washington holds the highest on-time payment rate of any state in the country, coming in at 92.8% in March.
On-time payment rates picked up across all price points in March, with low-priced rentals seeing substantial month-over-month improvement. Meanwhile, 2–4-unit rental properties held the highest on-time payment rates of all sub-property types in March, coming in at 85.6%.

7. NEW & PENDING HOME SALES

New single-family home sales rose to an annualized rate of 640,000 in February, up 1.1% from January but down by 19.0% year-over-year. It was the third consecutive month where new home sales rose, partly due to a moderation in mortgage rates that has fueled recent homebuying activity.
Regionally, the South and West US saw transaction increase in the month while the Northeast underperformed.
Pending home sales similarly grew for the third consecutive month during February, climbing by 0.8% month-over-month, according to the National Association of Realtors. Year-over-year pending transactions fell by 21.1%.
NAR Chief Economist Lawrence Yun sees the concurring upticks as evidence that the “housing sector’s contraction is coming to an end,” as both sales indicators alongside construction activity have trended up in the past quarter.

8. HOME PRICES

Home prices continued to decline through January 2023, according to the latest update to the S&P CoreLogic Case-Shiller US National Home Price Index. Compared to June 2022’s peak, average home prices are down 3.0%. Still, measured year-over-year, home prices remain up 3.8% through January.
Miami (+13.8%), Tampa (+10.5%), and Atlanta (8.4%) reported the highest year-over-year increases within the 20 cities tracked by the index, with Charlotte (+8.1) following close behind. San Francisco, Seattle, San Diego, and Portland registered negative year-over-year growth.
Before seasonal adjustment, 19 cities tracked reportedly registered a decline in home prices, while 15 cities tracked registered an increase. However, in both seasonally adjusted and non-seasonally adjusted figures, January’s performance was notably better than December’s.
Regionally, the Southeast (+10.2%) remains the strongest region for growth, while the West (-1.5%) remains the weakest.

9. CONSUMER SENTIMENT

According to preliminary estimates for March by the University of Michigan, consumer sentiment fell for the first time in four months to an index reading of 63.4. The first estimate for March sits roughly 5% below February’s mark but remains 7% above this time last year.
All index sub-components worsened during the month, mainly due to persistently high prices of goods and services and financial uncertainty.
Notably, roughly 85% of responses for the current estimate were made before the collapse of Silicon Valley Bank and other financial market stress, which may signal a downward revision in future updates.
Year-ahead inflation expectations fell to 3.8% in March, the lowest reading since April 2021. Long-run inflation expectations also declined, falling to 2.8%, only the second time in the past 20 months that the metric dipped below 3.1%. Both expectations metrics remain elevated above their pre-pandemic normal ranges.

10. MAY RATE-HIKE PROBABILITIES

According to the Chicago Mercantile Exchange’s Fed Watch Tool, futures markets are relatively split on forecasts for May’s policy meeting. The majority of markets (52.9%) are pricing in a pause in the Fed’s interest rate hikes, while a weighty minority (47.1%) expect a 25 basis points hike in May. The current federal funds rate sits at 475-500 basis points.
Recent US bank failures swung what was initially a firmly hawkish forecast in early March into an increasingly dovish one leading up to the Fed’s March 22nd policy decision. Many investors are betting that the financial market distress, alongside slowing inflation, will encourage the Fed to pause rate increases to provide liquidity to the market. Futures markets now anticipate that the committee will hold rates steady until the September 2023 meeting, when markets expect the Fed to begin loosening again.

SUMMARY OF SOURCES

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