SVN | Research Economic Update 6.24.2022

1. FED POLICY MEETING

At its latest policy meeting on June 15th, the FOMC raised the Federal Funds rate by 75 bps to a range of 1.5%-1.75%, its steepest rate hike since 1994. The move follows a May inflation rate of 8.5%.
The yield on the 10-year Treasury note fell during the week out of fears that an increasingly aggressive Fed could tip the US economy into recession.
The most recent Summary of Economic Projections forecasts a 3.4% year-end Fed-funds rate, a 150 bps increase from the March-meeting forecast. Officials also cut their 2022 GDP growth outlook to 1.7% from 2.8% in March. Officials see inflation easing in 2023, with an average forecast of 2.7% core PCE, but this forecast has remained unchanged since the initial March rate hike.
The stock market initially rose after the policy release but fell later in the week as pessimism around tightening’s impact on growth rattled investor sentiment. The S&P 500 finished up 0.2% on Friday but fell 5.8% over the week.

2. MSCI REAL CAPITAL ANALYTICS

The US National All-Property Price Index, which produces a weighted measure of commercial real estate prices, rose by 18.6% over the year ending May 2022, according to MSCI Real Capital Analytics (MSCI RCA). Month-over-month, prices rose 1.1%, which would convert to a 9.7% annualized growth rate— the fastest observed growth rate in the past four months.
Industrial retained the accolade of the sector seeing the fastest annual rise, climbing by 28.6% year-over-year. Industrial also saw the most rapid month-over-month appreciation in May, rising 1.3% (24.4% annualized growth rate).
Apartment prices were close behind, growing 23.3% year-over-year. Month-over-month, apartment prices rose by about 1.5% in May (19.2% annualized growth rate)
Retail and Office asset prices are up 18.8% and 12.2% year-over-year, respectively. Notably, Central Business District Office prices are outpacing Suburban Office prices, measured both year-over-year (13.4% vs. 10.5%) and month-over-month (0.9% vs. 0.6%).

3. APARTMENT INVESTMENT MARKET INDEX

Freddie Mac’s Apartment Investment Market Index (AIMI) fell for the second consecutive quarter, registering a 5.3% quarter-over-quarter decline in Q1 2022. AIMI is down -6.1% from Q1 2021.
While net operating incomes (NOI) have continued to rise, an increase in mortgage rates and property prices have offset NOI’s impact. NOI is up 19.8% year-over-year, while property prices and mortgages are up 21.1% and 41 basis points, respectively, over the same period
AIMI fell in all 25 tracked metros, but each metro also recorded increases in NOI from Q4 2021. NOI growth was 2.5% quarter-over-quarter, with the fastest growth in Miami, which grew 5.6% from Q4 2021. Portland grew the slowest, at just 0.9%.
Mortgage rates grew 29 bps from the previous quarter, its most significant single quarter gain since Q2 2018. Mortgage rates are 41 bps above their average one year ago.

4. GLOBAL SUPPLY CHAIN PRESSURE INDEX

According to the New York Federal Reserve’s Global Supply Chain Pressure Index (GSCPI), global supply chain pressures fell in May. Still, supply chain pressures remain at historically high levels. The index fell from 3.4 in April to 2.9 in May. The index value represents how many standard deviations from the historical mean current supply chain conditions reside.
Most GSCPI components—which include commonly used metrics such as the Baltic Dry Index, the Harper Index, airfreight cost indices, and sub-components of the Purchasing Managers’ Index— decreased.
The recent movement in the GSCPI signals a potential stabilization of global supply chain pressures at
historically high levels.

5. CONSUMERS CUT BACK ON DINING

A recent study by Morning Consult reports that 53% of adults in the US have adjusted their eating and drinking spending because of high inflation. 72% of consumers say that they have intentionally taken steps to save money due to inflationary pressures.
In addition to the price inflation seen at restaurants and eating establishments, the CPI sub-component measuring food at home is up 11.9% over the past year, adding pressure to consumers’ wallets.
Regionally, 56% of consumers in the Midwest report changing spending behavior due to inflation. The South was a close second with 55% of consumers changing spending behavior, while the West saw 53% of consumers adjusting spending. The Northeast saw a significantly less impact, with 46% of consumers adjusting spending habits.
Of respondents that say they have made adjustments, 8-in-10 report eating at restaurants less often, while 3-in-4 report going to bars left often.
Women were 13 percent more likely than men to have adapted their spending.

6. NAIOP OFFICE SPACE DEMAND FORECAST

According to NAIOP, the US office market absorbed 21.6 million square feet of supply over the final quarter of 2021 and the first quarter of 2022. Still, vacancy rates rose for the tenth consecutive quarter, though NAIOP notes that a wave of new product deliveries is at least partially to blame.
For the year, net absorption totaled -23.7 million square feet, slightly better than the -30.9 million that NAIOP had forecasted. Further, 2021’s net absorption total was an improvement from 2020’s total of -73.3 million square feet.
NAIOP forecasts that net office space absorption will total 46.9 million square feet between Q2 2022 and the end of the year, reflecting slowing, though still growing, economic growth and an uptick in
office space utilization.

7. INDEPENDENT LANDLORD RENTAL PERFORMANCE

Research by Chandan Economics indicates that the on-time collection rate for independently operated residential properties improved by 129 bps between May and June, rising to 81.5%. May’s month-end ontime payment rate was revised up 214 basis points (bps) from the preliminary estimate of 80.2%.
Gateway markets have maintained higher on-time payment rates than units located elsewhere for sixconsecutive months through June 2022. The June on-time rate for Gateway markets stands at 83.0%, while non-gateway markets registered an on-time rate of 81.3%.
Sun Belt rentals have underperformed the rest of the US for three consecutive months, registering a gap of 65 bps in June 2022. The Sun Belt’s growing success has seen some affordability issues arise, as markets re-price more quickly than some existing residents can handle.
2-4 Family rentals maintained the highest on-time payment rate of all sub-property types in June, coming in at 82.0%.
Mid-priced rentals ($1,500-$2,499) continue to outperform all other price points, recording an on-time rent payment rate of 85.0% in June. Units with monthly rents below $1,000 continue to perform the worst, with just 80% paying on time.

8. NFIB SMALL BUSINESS SURVEY

The National Federation of Independent Businesses Small Business Optimism Index fell 0.1 points to 93.1 in May, a nearly five-decade low for the index.
A net negative 54% of owners expect business conditions to improve over the next six months. Future expectations have now fallen consecutively since January.
28% of respondents report inflation as their more pressing issue for operating their businesses, dropping four points from April. A net 72% of owners are raising prices, two percentage points from April.
51% of owners reported job openings they could not fill, rising from April. Meanwhile, a net positive 46% of owners reported raising compensation, a three-percentage point drop from April.
39% of owners cite supply chain issues as a significant hindrance to their business, up three percentage points from April. A separate 31% report a moderate impact from supply chain issues, while 22% report a mild one. Only 8% of owners say there is no impact from supply chain disruptions on their business.

9. CHICAGO FED NATIONAL ACTIVITY INDEX

The Chicago Fed National Activity Index (CFNAI), which boils down 85 separate indicators of national economic growth into a single index, stood at 0.01 in May, down from 0.4 in April.
Two of the four major categories of the index—personal consumption and housing (1) and production and income (2), made negative contributions during the month as activity contracted. The other two categories, employment, unemployment, and hours (1) and sales, orders, and inventories (2), increased activity.
Within production and income, manufacturing production fell 0.1% in May after a 0.8% increase in April.
Employment-related indicators contributed +0.08 to the CFNAI this month, up slightly from April. Personal consumption and housing contributed a -0.11 decrease to the CFNAI to –0.11 in May, down from +0.10 in April.

10. CMBS DELINQUENCIES

New reporting from Real Page shows retention rates are in line with the US average. Through Q1 2022, the US and the Southeast saw average retention rates of 58.5%.
Historically, retention rates in the Southeast have trended consistently below the national average, and the current convergence is a departure from pre-pandemic patterns.
Lower historical Southeast retention rates were primarily attributed to consistently lower regional apartment occupancy rates. Notably, retention rates have converged even as national occupancy rates have risen above levels observed in the Southeast.

SUMMARY OF SOURCES

(1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20220615a.htm
(2) https://www.msci.com/our-solutions/real-assets/real-capital-analytics
(3) https://mf.freddiemac.com/aimi/#:~:text=The%20Freddie%20Mac%20Multifamily%20Apartment,nationally%2C%20has%20changed%20over%20time
(4) https://www.newyorkfed.org/research/policy/gscpi#/overview
(5) https://morningconsult.com/2022/06/21/inflation-has-consumers-cutting-back-on-dining-andmeat/
(6) https://www.naiop.org/Research-and-Publications/Reports/Office-Space-Demand-Forecast-2Q22
(7) https://www.chandan.com/independentlandlordrentalreport
(8) https://www.nfib.com/surveys/small-business-economic-trends/
(9) https://www.chicagofed.org/research/data/cfnai/current-data#:~:text=The%20Chicago%20 Fed%20National%20Activity,end%20of%20each%20calendar%20month
(10) https://www.realpage.com/analytics/southeast-apartment-retention-trending-closer-nationalnorm/

1. MSCI REAL CAPITAL ANALYTICS CPPI

The US National All-Property Price Index, which produces a weighted measure of commercial real estate prices, rose by 17.9% over the year ending April 2022, according to MSCI Real Capital Analytics (MSCI RCA). Month-over-month, prices rose 0.5%, which would convert to a 6.3% annualized growth rate — a sign that some price growth momentum is slowing.
Industrial properties experienced the fastest annual rise in prices among the major property sectors, climbing by 26.0% year-over-year. Industrial also saw the fastest month-over-month appreciation in April, rising 1.3% (17.0% annualized growth rate).
Apartment prices were close behind, growing 23.0% year-over-year. Month-over-month, apartment prices also grew by about 1.3% in April (16.6% annualized growth rate)
Retail and Office asset prices are up 18.4% and 11.8% year-over-year, respectively. The only sub-index in the MSCI reporting to see an increase in its year-over-year growth rate for April was Central Business District Office properties (12.3%).

2. SENIOR LOAN OFFICER OPINION SURVEY

The Federal Reserve’s April Senior Loan Officer Opinion Survey, which was conducted over the first quarter of 2022, indicates that lenders are increasingly pulling on the reins as borrower demand has lessened.
For commercial properties, an equal number of lenders report tightening and loosening underwriting standards, though this is a shift of 14.5 percentage points toward tightening compared to the previous quarter. A net 3.1% of respondents saw demand fall for commercial loans over the first quarter — a shift of 16.3 percentage points from the prior quarter when a net 13.2% reported rising demand.
For Multifamily, a net 9.2% of respondents still reported loosening underwriting standards, though this is a 14.0 percentage point shift down from the end of 2021. For Multifamily borrower demand, 18.5% of lenders reported seeing growing borrower appetites, declining from 37.7% in the prior survey.

3. US INDUSTRIAL MARKET

Prologis’ newly produced “True Months of Supply (TMS)” metric shows that the US Industrial Market currently has a record-low 16-months of supply, according to data tracked across 30 US metros.
According to Prologis, before 2021, the Industrial market had never sunk below 32 months of supply. Anything under 50 months of supply is generally considered a signal of rent growth throughout the market.
Analysts predict that TMS will average 20 months of supply in 2022 with projected rent growth of 22% over the same period. Vacancy rates are expected to hold at a record low of 3.3%.
Prologis states that the traditional Industrial Supply metric did not accurately reflect the rate of vacancies in the development pipeline, a large portion of which tends to be pre-leased, requiring an adjustment in how supply is calculated.

4. WEF GLOBAL OUTLOOK

The World Economic Forum (WEF), which recently met in Davos, Switzerland for its annual conference, also released its quarterly economic outlook, where surveyed economists moderated their expectation of strong economic growth and normalized inflation.
The US remains poised to have one of the better economic rebounds in 2022. 92% of WEF’s Chief Economist Survey respondents see US activity being either moderate or strong in 2022 despite recent uncertainty. Only South Asia and East Asia/Pacific registered higher scores in this regard, capturing 96% and 95% of responses, respectively.
When polled on inflation, respondents see the 2022 outlook to be most challenging for Latin America and the US, with 41% and 38%, respectively, expecting significantly higher inflationary pressures throughout the rest of the year.
Real wages are also expected to decline, with over two-thirds of respondents expecting that the average real wage will reduce significantly across advanced economies.

5. HOUSING MARKET UPDATE

The NAHB/Wells Fargo Housing Market Index (HMI) fell from 77 to 69 in May. All major subcomponents of the index — current single-family home sales, projections of single-family home sales over the next six months, and current traffic of prospective buyers — posted month-over-month declines.
Regionally, sentiment in the Northeast and South continues to outpace the West and Midwest. However, the Northeast was the only region to see sentiment increase from April. Notably, sentiment in the Northeast consistently underperformed the South and West regions throughout most of 2021. As of May, the Northeast and South Regional HMIs are at the same level.
New residential construction data from the Census Bureau this month shows that residential permits, starts, and completions all fell from March to April. The HMI historically tracks closely to these data.

6. INDEPENDENT LANDLORD RENTAL PERFORMANCE

Research by Chandan Economics indicates that the on-time collection rate for independently operated residential properties declined by 111 basis points between April and May, falling to 78.1%. April’s month-end on-time payment rate was revised down 24 basis points (bps) from the preliminary estimate to 79.2%.
Gateway markets have maintained higher on-time payment rates than units located elsewhere for five consecutive months through May 2022. The May on-time rate for Gateway markets stands at 80.2%.
Sun Belt rentals underperformed the rest of the US by 31 bps in April and 188 bps in May. As the region sees growing success, a concern arises that Sun Belt markets are re-pricing more quickly than some existing residents can handle.
2-4 Family rentals maintained the highest on-time payment rate of all sub-property types in May, coming in at 81.1%.
Mid-priced rentals ($2,000-$2,499) continue to outperform all other price points, recording an on-time payment rate of 83.8%. Units with monthly rents below $1,000 performed the worst.

7. THE STATE OF COMMERCIAL REAL ESTATE BUILDING OPERATIONS

A survey of Commercial Real Estate professionals conducted by the firm Building Engines found that a large majority of CRE professionals saw their portfolios either increase or remain the same in 2021 relative to 2020. Further, most expect their tenants to reoccupy offices by summer 2022 (the reoccupation question was posed before the Omicron variant outbreak).
According to respondents, the most common office tenant request was faster responses to work orders and maintenance requests (50%) (those surveyed could submit up to 3 answers for the question, so the total does not equal 100%). Enhanced health and safety protocols came in second (45%), and updates to tenant amenities were third (38%).
67% of respondents believe that their tenants plan to use a hybrid work model.

8. RETAIL TRADE/REBOOK INDEX

Seasonally adjusted US retail and foodservice sales were $677.7 billion in April, a 0.9% increase from March and an 8.2% increase above April 2021’s level.
Retail trade sales rose 0.7% from March to April and are up 6.7% from April 2021. Gas stations are up 36.9% year-over-year, while food and drinking places saw a 19.8% year-over-year increase.
The May 21st release of the weekly Redbook Index, a sales-weighted measure of year-over-year same-store sales growth among US retailers, increased by 11.4% over the same week in 2021. Year-over-year growth in the Redbook Index reached an all-time high during the Black Friday/Cyber Monday week in November 2021.

9. JOBLESS CLAIMS

After beginning to climb from its pandemic floor throughout April and early May, initial jobless claims fell during the week ending May 21st, an encouraging sign as markets and policymakers brace for the possibility of an impending US recession.
Initial jobless claims stood at 210,000 according to the Department of Labor’s latest figures, a decline of 8,000 from the previous week. The four-week moving average for initial claims rose by roughly 7,000 to 206,750, mainly reflecting the consecutive increases registered earlier in the month.
Continued unemployment claims, for which the latest data is available through May 14th, ticked up by 31,000 from the week before, landing at 1.34 million. However, last week’s metric was the lowest on record, reflecting both the lag that continued claims have compared to initial claims and the overall favorable position of today’s labor market despite increased economic uncertainty.

10. FED MEETING MINUTES

Minutes from the Federal Reserve’s January meeting show that the FOMC is prepared to conduct additional 50 basis point hikes in the future if needed to re-anchor inflation expectations, a divergence from what most market participants expect. Fed futures edged higher following the release.
Additionally, the median Desk survey response indicates another 125 basis points of increase by the middle of next year, raising the median target range to 3.31%, much higher than predicted in previous surveys.
Notably, the committee stated that they might move past having a “neutral” policy stance and into a “restrictive” one. While vague in detail, it is a clear signal that the Fed has moved into an increasingly aggressive approach to taming inflation.

SUMMARY OF SOURCES

(1) https://www.msci.com/our-solutions/real-assets/real-capital-analytics
(2) https://www.federalreserve.gov/data/sloos/sloos-202204-charts-data.htm
(3) https://www.globest.com/2022/05/13/prologis-us-industrial-market-has-record-low-16-monthsupply/
(4) https://www3.weforum.org/docs/WEF_Chief_Economists_Outlook_May_2022.pdf
(5) https://www.nahb.org/news-and-economics/housing-economics/indices/housing-marketindex
(5) https://www.census.gov/construction/nrc/pdf/newresconst.pdf
(6) https://www.chandan.com/independentlandlordrentalreport
(7) https://www.buildingengines.com/resources/report/the-state-of-commercial-real-estatebuilding-
operations-for-2022/
(8) https://www.census.gov/retail/marts/www/marts_current.pdf
(8) http://www.redbookresearch.com/
(9) https://www.dol.gov/ui/data.pdf
(10) https://www.federalreserve.gov/monetarypolicy/fomcminutes20220126.htm

1. GDP

Real GDP decreased by an annualized 1.4% during Q1 2022, down from Q4 2021’s revised figure of 6.9%. This is the first quarterly contraction in US economic growth since the early days of the COVID-19 pandemic in Q2 2020.
Increased COVID-19 cases due to the Omicron variant continued to disrupt economic activity while government assistance programs, including small business loans, grants to state and local governments, and payments to households, continued to sunset.
Decreases in motor vehicle sales and retail trade contributed the most to a broader decrease in private inventory investment. Exports declined, largely due to a decrease in sales of nondurable goods, but this was partially offset by an increase in financial serves and other business services. Imports rose over the quarter.
Personal consumption expenditures rose, largely reflecting a rise in health care and other services, while goods registered a decline. Within goods, nondurable goods, particularly gasoline and other energy-related items, declined. On the other hand, durable goods, led by Motor Vehicles and parts, as well as nonresidential fixed investment, increased.

2. ULI SPRING ECONOMIC FORECAST

The Urban Land Institute forecasts strong economic and employment growth through the end of the year, according to its latest Real Estate Economic Forecast.
The report, released several days before the Bureau of Economic Analysis (BEA) Q1 2022 GDP update, predicts the economy returning to pre-pandemic growth by 2024. In their analysis, ULI notes an expectation that commercial real estate transaction volume will moderate somewhat in the coming years, declining from a record $846 billion in transactions in 2021 to $800 billion in 2022. Their forecast predicts volume to fall to $725 billion in 2023 before rising again to $750 billion in 2024.
After experiencing price growth of 19.5% in 2021, the report projects a moderation in price increases but still with significant growth, forecasting a 10% average increase in 2022 before falling to 6.0% and 5.9% in 2023 and 2024, respectively.
The report does not expect a significant change in vacancy rates over the forecast period due to an expectation that demand will remain strong amid historically tight inventory.

3. RECESSION RISKS

Earlier this month, Deutsche Bank became the first major bank to forecast a coming US recession— largely based on concerns that the Federal Reserve may not be able to achieve a “soft landing” for monetary policy, potentially pushing the economy into a recession.
Persistent inflation has forced the Fed’s hand to try and aggressively get a handle on price stability From the view of Deutsche Bank economists, “It is now clear that price stability…is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand.”
Their forecast predicts a “mild” US recession that would last just a couple of quarters with the potential to push the unemployment rate up to 5%. The bank’s economists base this on a consensus that the Fed could raise its policy rate as high as 3.5% to cool price increases that they see extending into next year— a move that could deliver a blow to consumer demand.

4. APARTMENT SECTOR UPDATE

According to Real Capital Analytics (RCA), Apartment cap rates are averaging 4.7% through Q1 2022 holding steady since Q3 2021.
Both subsectors that RCA tracks, Garden and Mid/Highrise Apartments, saw cap rates compress over the past four quarters, declining by 29 and 26 basis points, respectively.
Apartment transaction volumes fell to $62.96 billion in Q1 2022 after a record-breaking performance in Q4 2021, where transactions reached $161.63 billion. Still, volume is up 4.17% year-over-year.
Apartment unit valuations through Q1 2022 are down -2.28% quarter-over-quarter but remain up by 20.33% from one year ago.

5. OFFICE SECTOR UPDATE

According to Real Capital Analytics, Office sector cap rates have ticked up in recent months but remain near all-time lows, experiencing a slight increase from 6.2% to 6.3% in Q1 2022. Office cap rates are down by 20 bps year-over-year.
Cap rates for Suburban Office assets compressed by 40 basis points to 6.3% between Q1 2021 and Q1 2022. Office assets in Central Business Districts (CBD) saw cap rates rise by 80 bps to 5.9% from the previous quarter and are up 60 basis points from one year ago.
Office sector transaction volumes fell steeply in Q1 2022, declining by 37.3% to $35 billion. Both Suburban and CBD Office saw transactions fall by 35% or more.
Office sector valuations measured on a per square foot basis remained relatively unchanged, rising from $290 per square foot to $293 per square foot from the previous quarter. They are up 43.7% year over year.

6. RETAIL SECTOR UPDATE

According to Real Capital Analytics (RCA), Retail sector cap rates have remained steady over the past several quarters, charting in at 6.4% between Q3 2021 and Q1 2022. Retail cap rates are down by 20 basis points from Q1 2021.
Retail shops saw cap rates drop by 10 basis points from the previous quarter and are down 30 basis points from one year ago. Meanwhile, retail centers saw cap rates rise by 20 basis points from the previous quarter and remain unchanged from one year ago.
After reaching record transaction volumes (since RCA began tracking in 2001) in Q4 2021, the Retail sector saw volumes sink by 49.4% to $18.6 billion in Q1 2022. Still, retail transactions are more than double their Q1 2021 volume.
Measured on a per square foot basis, asset prices, on average, are down by 2.0% quarter-over-quarter but remain up by 16.4% year-over-year.

7. INDUSTRIAL SECTOR UPDATE

According to Real Capital Analytics, Industrial sector cap rates rose by 30 basis points from the previous quarter to 5.8% but just a tick up from one year ago, when cap rates stood at 5.7%.
Flex Industrial assets have posted the largest annual cap rate rise through Q1 2022, climbing by 30 basis points from one year ago to 6.4%. Meanwhile, Single Tenant Warehouse assets have ticked up by 10 basis points from one year ago.
After three consecutive quarterly increases, Industrial sector transaction volumes fell in Q1 2022 to $33.91 billion from $77.0 billion in Q4 2021. Still, volume is above the 22.6 billion registered in Q1 2021.
On a per square foot basis, Industrial sector asset prices climbed by 6.5% quarter-over-quarter to $139 per square foot. Momentum in the sector has remained strong throughout the pandemic recovery, with Industrial assets prices climbing by 21.0% over the past year.

8. BUILDER CONFIDENCE

Higher construction costs continue to take a toll on builder confidence, according to recent data by the National Association of Home Builders (NAHB)
According to the NAHB/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly-built single-family homes dropped two points to 77 in April, its fourth consecutive monthly decline.
The current sales conditions portion of the index fell two points to 85, while the subindex tracking the traffic of prospective buyers posted a six-point decline to 60. Sales expectations in the next six months increased three points to 73 following a 10-point drop in March.
Builders report a drop in sales traffic and sales conditions that fell to their lowest levels since summer 2021. Driving the decline are persistent supply chain issues alongside rapidly rising interest rates while rising home prices tamper demand in entry-level markets. Mortgage rates have risen by 1.9% since the start of the year.

9. SMALL BUSINESSES RAISING PRICES

According to a recent survey from the National Federation of Independent Businesses, roughly 40% of small businesses in the US plan to raise sales prices by 10% or more in the near future as inflation continues to rage across the economy.
The survey, which was conducted between April 14th and April 17th among 540 small business owners, shows that over two-thirds of respondents intend to raise their prices within the next three months. Roughly half of the firms are planning increases of 4% to 9%.
Nine-in-ten firms in the survey indicated that they’ve already had to raise prices in order to account for rising costs. 62% say that inflation is having a “substantial” impact on their business, with another third indicating a “moderate” impact. None of the respondents claimed that inflation was having “no impact.”

10. WORKFORCE CONFIDENCE INDEX

LinkedIn’s Workforce Confidence Survey reports that so far in 2022, the cities of Nashville, Greenville (SC), and Louisville outperform all other metros in workforce optimism.
The study, which constructs an index based on the responses of nearly 35,000 US professionals, reports that seven of the top-ten spots on their list were in the Southeastern corner of the US—another accolade of the region’s recent outsized economic performance.
Miami and Greensboro (NC) round out the top five, followed by Salt Lake City, Seattle, Pittsburgh, Hampton Roads (VA), and the Raleigh-Durham area. Each of the top three metros registered a score of 50 and above compared to the nationwide average of 41.
Driving the numbers are a series of factors. Nashville has benefited from a population influx alongside large investments by companies like Amazon and a booming healthcare sector. Greenville has become a growing hub for automobiles, with a large regional footprint by BMB alongside others. Louisville has benefited from a more diverse economy, with significant footprints from healthcare, manufacturing, retailing, financing, lodging, and transportation/warehousing.

SUMMARY OF SOURCES

(1) https://www.bea.gov/news/2022/gross-domestic-product-first-quarter-2022-advance-estimate
(2) https://americas.uli.org/spring-economic-forecast-2022/
(3) https://www.marketwatch.com/story/first-major-wall-street-bank-to-call-for-a-recession-now-sees-clear-outside-risk-it-could-be-more-severe-11650993784
(4) https://app.rcanalytics.com/#/trends/downloads
(5) https://app.rcanalytics.com/#/trends/downloads
(6) https://app.rcanalytics.com/#/trends/downloads
(7) https://app.rcanalytics.com/#/trends/downloads
(8) https://eyeonhousing.org/2022/04/housing-market-at-inflection-point-as-builder-confidence-continues-to-fall/
(9) https://assets.nfib.com/nfibcom/Inflation-Survey-FINAL.pdf
(10) https://www.linkedin.com/pulse/feeling-good-10-us-metros-top-all-rivals-workforce-george-anders/COMMERCIAL

Fullerton, CA – April 14, 2022 – SVN | VANGUARD, one of the nation’s premier commercial brokerage firms, has negotiated the sale of the Vanguard Business Center, a 35,093 square foot, office building located at 2601 -2651 Chapman Avenue in Fullerton, CA to an undisclosed buyer for $9.25 million.

Jon Davis, Senior Vice President at SVN | Vanguard represented the sellers in the transaction.

The site has been approved for a student housing development as it is in close proximity to California State University, Fullerton. The site is across the street from an existing mixed-use student housing development known as Alight Fullerton. Other notable educational institutions in the area include Hope International University and Fullerton College.

About SVN | Vanguard

SVN | Vanguard is an independently owned and operated SVN® firm with offices in Santa Ana & San Diego, CA. The SVN® brand is a globally recognized commercial real estate entity united by a shared vision of creating value for clients, colleagues and communities. Currently, SVN comprises over 1,600 advisors and staff working in more than 200 offices across the globe. SVN’s brand pillars represent the transparency, innovation and inclusivity that enable all our advisors to collaborate effectively with the entire real estate industry on behalf of our clients. SVN’s unique Shared Value Network^® is just one of the many ways that SVN Advisors create outsize value for all stakeholders. For more information, visit www.svn.com.

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National Overview

OFFICE

As the pandemic sent corporate America from boardrooms to bedrooms in 2020, long-held assumptions about productivity are now rightfully up for debate. On one side of the spectrum are those that argue that office spaces facilitate an agglomeration of ideas, culture, and productive output. On the other hand, many argue that long commutes into places of work are outdated norms, and the commute time saved by remote work can generate both greater worker productivity and improved quality of life — a classic case of having the cake and eating it too. Now, with 2021 in the rearview, and after two distinct COVID waves derailed back-to-office timelines, there has been little resolution to the so-called big questions from a year ago.

According to The Pew Research Center, as of January 2022, for American adults who report being able to complete their jobs from home, 59% are doing so most or all of the time, and 18% do so some of the time. The VTS Office Index (VODI), which measures new Office leasing demand, remained down by 42% relative to its pre-pandemic benchmark through the end of 2021. As the public health threat lessens, these data will undoubtedly improve, but the question is by how much. In a tight labor market, the desires of workers can quickly transition into leverageable demands.

According to Morning Consult’s tracking of remote workers, 84% have enjoyed being remote, 79% feel they are more productive working remotely, and 76% would be more likely to apply for a job that offers remote work.¹

SVN® Product Council Office Chair Justin Horwitz notes that “arguably, Office properties were the most negatively impacted of all the product types as a result of the pandemic.” However, he holds that 2021 was a year of recovery as sales volumes came back to peak levels thanks to returning “investor demand for quality office buildings, […] particularly for well-stabilized assets in strong locations.”

In their Q4 2021 report, Moody’s Analytics REIS attests that while the stage was set for Office sector distress in 2021, the incoming performance data failed to show it.² Effective rent growth remained negative to begin last year but had returned to growth by the third quarter. Through Q4 2021, of the 82 markets that Reis tracks, 59 had positive absorption, 53 had improving occupancy, and 61 saw improving rent growth — a stark contrast from one year ago.

The open questions over the workplace of the future and its role in our daily lives appear most pertinent to Gateway markets such as New York. According to New York’s MTA, ridership of NYC’s subway system is forecast to be a long way off pre-pandemic ridership levels through 2025.³ Moreover, many of its stations seeing the largest declines in ridership are in Central Business Districts (CBDs) such as Midtown and Manhattan’s downtown Financial District.

Outside of Gateway markets, the picture on the horizon appears a bit rosier. According to a Chandan Economics analysis of Real Capital Analytics data, Suburban Office valuations continue to soar. Over the past three years, the relative price per square foot premium an Office sector investor would have to pay for a CBD asset over a Suburban asset shrank from 79% to just 49%. Mr. Horwitz notes that “suburban markets are the beneficiary of businesses adjusting to the “new normal.”

Financial Performance

TRANSACTION VOLUME

Transaction volumes for Office assets saw considerable improvement in 2021. According to Real Capital Analytics, more than $139 billion of asset value traded hands last year, a 56.5% improvement over 2020’s total. Still, despite the improvement, the Office sector was the only major CRE property type that did not eclipse its 2019 peak in 2021, as transaction volumes fell about $5 billion short.⁴ While the resumption of strong trading volumes is encouraging, the apparent lack of pent-up demand that has been observed in other property types may signal continued concern for the sector as hybrid work figures to be a market-shaping force for years to come.

CAP RATES AND PRICING

Cap rates for Office properties declined steadily throughout 2021, finishing the year with a sector average of 6.2% — down 31 bps year-over-year.⁵ Suburban Office assets continued their bull run in 2021 as pandemic-induced migration patterns and remote work adoption has proven broadly supportive of suburban commercial real estate at the expense of central cities, especially in Gateway markets. Last year, cap rates for suburban Office assets sank by 38 bps, settling at 6.3%.⁶ As recently as mid-2019, the cap rate spread between suburban and Central

Business District located Office assets stood as high as 147 bps.⁷ Through Q4 2021, this spread has fallen to just 55 bps.⁸ Medical Office assets also saw significant cap rate compression last year, declining 38 bps to 5.9%.⁹ Meanwhile, Single Tenant Office assets saw cap rates fall by just 4 bps, landing at 6.5%. Central Business District Office assets, the most maligned property group in the sector, saw cap rates rise by 18 bps in 2021, settling at 5.8%.¹⁰

Prices for Office assets finished 2021 up an average of 6.1% from the year earlier. Single Tenant Office assets were the clear laggard of the group, as prices increased by just 5.4% year-over-year through Q4 2021. CBD assets followed next with annual price appreciation rates of 10.4%. Again, Suburban and Medical Office properties were the clear winners in 2021, as prices grew an average of 15.1% and 15.5%, respectively.

Markets Making Headlines

TERTIARY WESTERN MARKETS ON THE RISE

The major Office success stories throughout the pandemic have come from outside of the traditional globalized markets like New York, San Francisco, and Los Angeles. Instead, outflowing residents and businesses from the traditional hubs into tertiary alternatives has generated momentum for a number of well-positioned smaller cities.

Nevada continues to be a standout in this area. Las Vegas seemingly has gleaned lessons from the Great Recession, and over the past decade, it has made significant progress in diversifying its labor market. Las Vegas led all other metros for the largest gains in Office sector property valuations last year (+13.2%), according to CoStar. For nearby Reno, it is a similar story. The rising competitiveness of Reno saw its Office sector post the nation’s third-biggest jump in rents (+4.9%) and the fourth largest jump in occupancy rates (+1.6%) last year.¹¹ The Economic Development Authority of Western Nevada credits Reno’s recent success to a decade-long labor diversification plan adopted in Washoe County.¹² Reno’s unemployment rate sat at a rock bottom 2.8% at the end of 2021 — 1.1 percentage points better than the national average.¹³

Moving beyond Nevada, several other secondary cities in the West continue to see their stock rise. San Diego posted a sizable jump in Office space net absorption totals in Q4 2021, coming in at 648,414 square feet, surging from just 2,913 square feet in the same period the year prior.¹⁴ Colorado Springs, CO, stands as a rare example of a metro where there are more employees today (310k) than there were entering the pandemic (305k).¹⁵ According to CoStar, the relatively small Colorado city posted the fifth biggest jump in Office sector valuations last year, rising a healthy 8.8%.¹⁶

In Spokane, WA, short-term headaches created by the pandemic are pitted against long-term improving fundamentals. According to Guy Byrd of SVN | Cornerstone, “Spokane’s CBD has been the weakest performing market in the last year as a significant number of tenants are choosing the increasingly popular hybrid work model.” He goes on to cite that “recruiting top talent and providing attractive work environments for workers who now prefer remote work is a significant new challenge.” Still, Washington State anticipates that Spokane will be a site for significant growth in the years ahead. While Spokane County is home to just over half a million people, the State’s Office of Financial Management projects that its resident population will swell by another 90k by the year 2040.¹⁷ Despite the ongoing headwinds, Mr. Byrd notes that vacancy rates improved last year as “users were forced to reinvent the most effective office environment.” Moreover, sales volumes also ticked up in 2021 “due to low interest rates and minimal new office construction,” a trend that forecasts should carry into 2022, “subject to economic conditions vital to the market.”

THE UNRETIREMENT COMMUNITY

Success begets success. Florida saw its population grow by 211k people in 2021 — more than every state not named Texas.¹⁸ With the influx of new residents, there is increased demand throughout all verticals of commercial real estate. After all, these incoming residents need places to live, places to shop, and places to work. Florida’s Office markets, including in suburban settings, saw statewide success in 2021.

Fort Myers, a smaller Office sector compared to Florida’s more developed alternatives, has seen demand far outpace supply as it currently boasts the highest market-level occupancy rate (95.5%) in the country.¹⁹ Moreover, between the end of 2020 and the end of 2021, the Office occupancy rate rose by the second-highest clip in the country, growing by 1.8 percentage points.²⁰

According to SVN | Commercial Advisory Group’s Larry Starr, Sarasota is “boasting some of the strongest office rent growth in the country,” a claim that is backed up by CoStar data, which shows rents in the area growing by 5.3% last year.²¹ “Office demand has remained strong in Sarasota throughout 2021, pushing vacancies to new lows.” In Tampa, a metro that has seen as much commercial real estate success as sporting success over the past half-decade, saw firming demand last year. Mr. Starr notes that Tampa remained a standout as “both asking rents and office demand improved throughout 2021, significantly outperforming the National Index.” Mr. Starr does see the potential for some softness in 2022, suggesting that Tampa’s office sector will be “challenged due to the increase in the amount of space available on the market,” as the pandemic triggered “the largest supply wave in over a decade.” Still, he sees the rising profile of Tampa and its ability to attract re-locating businesses as broadly supportive of the city’s long-term fundamentals, citing that “office investment activity has sharply increased with annual sales volume roughly doubling 2020 levels.”

Macro Economy

ECONOMIC GROWTH

The US economy has experienced a robust recovery from the initial shock of COVID-19. A pandemic-driven shift in consumption away from services and into goods, boosted by a sweeping stimulus effort, reconditioned our economy well before an off-ramp from the public health crisis was in sight. By Q3 2020, inflation-adjusted GDP shrugged off its worst quarterly performance on record to record its best, a 33.4% annualized growth rate.¹ In 2021, the total nominal value of all consumption and production reached $23.0 trillion, a 9.1% increase above 2020’s total and 6.9% above 2019’s total. After adjusting for inflation, the US economy is 3.2% larger than its pre-pandemic peak.²

The foundation of the economy’s rebound has been a swift labor market recovery. At its April 2020 peak, the official unemployment total reached a staggering 23 million people.³ By the start of 2021, the unemployment total had improved to just 10.1 million people out of work.⁴ Over the past year, this level has come down to 6.5 million people, less than one million above the pre-pandemic level of 5.7 million.⁵

INFLATION & MONETARY POLICY

One year ago, the market consensus was that the Federal Open Market Committee (FOMC) would not begin a monetary policy tightening cycle until 2023. However, as demand surges in the face of gummed-up supply chains, rampant inflation has emerged at center stage, forcing shifting guidance from policymakers.

After decades of tepid price increases, in January 2022, the Consumer Price Index (CPI) reached 7.5%, a level not seen in 40 years.⁶ Core-PCE, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, reached 5.2% in January, prompting the FOMC to be increasingly committed to an interest-rate hike at its March 2022 meeting.⁷ In just 24 months, policymakers at the Federal Reserve have repositioned themselves from a tighter monetary policy stance into an accommodative one and back to a tightening one. According to the CME Fed Watch Tool, as of February 23rd, future markets are forecasting seven rate hikes by the end of the year — a sizable shift from even just one month earlier, when future markets were forecasting just four rate hikes in 2022. Volatile swings in the medium-term outlook are symptomatic of the rapid shifts in economic activity that categorized the past two years.

In December, Fed officials looked on cautiously at the near-term outlook as Omicron emerged as a roadblock to economic normalcy. After the Delta variant led to declining activity and sluggish job growth in mid-to-late summer 2021, some officials worried that Omicron, a more transmissible variant of COVID compared to previous waves, would hinder the recovery. While a significant wave of US cases followed, the Omicron wave proved to be less deadly and less straining on the US public health system than previous ones. As a result, an increasing number of US states and municipalities are relaxing masking and vaccine restrictions. On February 25th, the CDC introduced a new slate of guidelines that experts say shifts the US into the “endemic phase” of the pandemic. The new guidelines would put more than half of US counties and over 70% of the population in “low” or “medium” risk designations, bolstering the FOMC’s willingness to remove accommodative monetary policies.

THE GREY AREAS

Still, a measurable dose of uncertainty overhangs stock markets and the whole macroeconomy. The VIX, a volatility index captured by the Chicago Board Options Exchange, has remained stubbornly elevated since the onset of the pandemic. Despite moderately retracting during the fall of 2021, the annual average for the VIX in 2021 was 19.7, 27.7% above its 2019 average.⁸

The SVN Vanguard team can help with your office real estate needs. We can help you find the ideal office property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

NATIONAL OVERVIEW SOURCES

Morning Consult, as of February 26th, 2022.

Moody’s Analytics REIS, report found here: https://cre.moodysanalytics.com/insights/cre-trends/q4-2021-office-first-glance/

https://www.osc.state.ny.us/files/reports/osdc/pdf/report-10-2022.pdf

Real Capital Analytics; Through Q4 2021

Real Capital Analytics; Through Q4 2021

Real Capital Analytics; Through Q4 2021

Real Capital Analytics; Throughout Q4 2021

Real Capital Analytics; Throughout Q4 2021

Real Capital Analytics; Throughout Q4 2021

Real Capital Analytics; Throughout Q4 2021

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

https://knpr.org/knpr/2022-02/northern-nevadas-economic-diversification-helped-soften-impact-pandemic-can-southern

Bureau of Labor Statistics

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

Bureau of Labor Statistics; Through December 2021

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

https://www.krem.com/article/money/economy/boomtown-inland-northwest/spokane-county-future-growth/293-6859dcc0-bd63-40ef-8f16-c483fa61c9e1

US Census Bureau

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

CoStar; Through Q4 2021. Note: Measured across the top-100 markets

MACRO ECONOMY SECTION SOURCES

US Bureau Economic Analysis

US Bureau Economic Analysis

US Bureau Labor Statistics

US Bureau Labor Statistics

US Bureau Labor Statistics

US Bureau Labor Statistics

US Bureau of Economic Analysis

Chicago Board Options Exchange

National Overview

MULTIFAMILY

Aside from “location, location, location,” the most cliché phrase in real estate may be “people will always need somewhere to live.” Its overuse is a symptom of its accuracy. The Multifamily sector had every excuse available to post a down year in 2021, yet its performance proved to be nothing short of phenomenal. As noted by SVN® Multifamily Chair Reid Bennett, CCIM, the sector faced “unknowns of the pandemic, rent moratoriums, interest rate hike threats, and inflation at a four-decade high.” Nonetheless, markets across the country range from nearly fully recovered to well ahead of where they were two years ago before the pandemic.

A key reason why rental housing has seen such widespread success in recent years is that the US has undersupplied enough new stock to keep pace with growing demand. Between 2002 and 2010, the amount of vacant housing supply available for sale or rent has typically equaled between 4% and 6% of the total number of US households. ¹ Through Q4 2021, after more than a decade of declines, this excess housing supply has slumped to just 2.6%. In other words, supply is (very) tight.²

A major concern when the pandemic started was whether renter households would be able to make their monthly payments on time, if at all. According to the NMHC, rent collections in professionally managed units dipped marginally during the beginning of the pandemic but not enough to be categorized as distress. On the other hand, rental units operated by independent, mom-and-pop landlords proved to be far more sensitive to the shutdown’s economic effects. According to Chandan Economics and RentRedi, on-time rental payments sank by more than 9 percentage points between March and May 2020. Still, despite the pandemic’s multiple waves, 2021 was a year of recovery for small apartment operators. Through January 2022, on-time rent collections were back in line with where they were entering the pandemic.

For the year ahead, there is at least some concern over how the sector will absorb higher interest rates as the Federal Reserve readies multiple rate hikes. Since 2010, the number of rented housing units in the US has expanded by about 13%.³ Over the same time, the amount of outstanding multifamily debt in the country has more than doubled (+114%).⁴ In short, the US rental housing sector has become substantially

more leveraged over the past decade. Given the relative increase in indebtedness and the specter for higher debt servicing costs on the horizon, this is an area that deserves some risk consideration in the year ahead.

Still, all else equal, the balance of factors broadly supports continued investment success in the US rental housing sector in 2022. With an eye on the horizon, Mr. Bennett identifies three underlying factors that should strengthen the sector in 2022:

• A high number of new entrants into the space (including retail buyers, office buyers, and multifamily syndicators) are competing with an already crowded pool of multifamily buyers.
• Household formations and Baby Boomers re-entering the rental pool will continue to support stiff competition for incoming supply.
• This year (2022) will be the last year of 100% bonus depreciation, where many buyers will be overextending to receive this benefit for themselves and their investors.