1. INTEREST RATE DECISION/ECONOMIC PROJECTIONS

• At its September 20th meeting, FOMC officials left their benchmark interest rate unchanged, just their second pause since they began tightening rates in March 2022.
• Markets and onlookers were well-prepared for the decision, with futures markets pricing in a no-hike scenario in September for the past several weeks. Like their recent pause in June, officials leaned their decision on recent data, expressing a need to “proceed carefully” in determining the direction and magnitude of the policy decisions moving forward.
• Key officials have signaled their expectation that at least one more rate increase will occur before the year’s end. In its accompanying Summary of Economic Projections, the Fed’s dot-plot forecasts an additional 25 bps hike in 2023 before two cuts in 2024. Notably, this month’s projections indicate two fewer rate cuts in 2024 compared to their last projections released in June.
• The Fed’s projections also revised up expectations for 2023 end-of-year economic growth, forecasting GDP to rise 2.1% this year.

2. CONSUMER CONFIDENCE

• US consumer confidence fell to a four-month low in September, eroded by resurging concerns around inflation and a potential US recession, according to the latest data from the Conference Board.
• Consumers continue to shift towards a more pessimistic outlook despite relatively upbeat views about the present day. One of the components of the Conference Board’s index—the present situations index— which assesses consumers’ opinions on current business and labor market conditions, rose slightly during the month. Meanwhile, the expectations index, based on consumers’ short-term forward outlook on those same conditions, has fallen for back-to-back months.
• After recession fears reduced throughout the summer, they are evidently on the rise again. According to the report, consumer fears of an “impending recession” ticked up slightly during the month.

3. HOME SALES & PRICES

• Sales of new single-family houses in the US fell 8.7% to a seasonally adjusted annualized rate of 675,000 properties in August, according to the latest data from the US Census Bureau.
• The decline in August is in line with recent mortgage rate movements, which have continued to rise in September and could signal further downside effects to demand on the horizon.
• The Midwest witnessed the most significant decline in sales on a percentage basis, dropping -17.2%, while the South saw the steepest rise, climbing by 7.5%.
• The median price of a new single-family home sold was $430,300 in August, down from $440,300 one year ago.

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• On-time rental payments in units operated by independent landlords remained robust in September 2023, with 82.6% of tenants completing their monthly payments on time, according to the latest data from Chandan Economics.
• Despite sliding slightly from August, September’s national on-time payment rate remains above its 12-month average (82.4%). Currently, it stands 241 bps higher than September 2022 — reflecting the sector’s arch of continued improvement.
• September’s forecast full-payment rate, which takes on-time payments, late payments, and expected late payments based on historical trends, came in at 92.7% — decreasing by a marginal 19 bps month-over-month.
• Western states continue to hold the highest on-time payment rates in the country, led by Colorado (92.6%), Utah (91.5%), Arizona (88.3%), North Dakota (88.1%), Washington (87.7%), and California (87.1%).
• Small multifamily (5-49 units) rental properties held the highest on-time payment rates of all sub-property types in September, coming in at 83.2%.

5. DALLAS FED MANUFACTURING INDEX

• According to the latest data from the Dallas Fed’s manufacturing Index, manufacturing activity—which has fallen consistently over the past year— accelerated its decline in September.
• The Dallas Fed index serves as a helpful barometer for nationwide manufacturing activity. September was the first month since May that the decline in activity has accelerated and signals a continued deterioration in business activity even as recession fears have reduced in recent months.
• Meanwhile, the production subindex of the report rebounded by nearly 20 points in September and climbed to its highest index reading of 2023. The New orders subindex of the report also rose during the month but remained in contraction as consumer demand continues to soften, but at a slower rate compared to earlier this year.
• The shipment subindex also moved higher and close to zero— a level consistent with neither expansion nor contraction.
• An uncertainty gauge of the index also saw a notable increase, in line with recent sentiment movements in small business optimism and consumer inflation expectations.

6. BEIGE BOOK SUMMARY

• According to the Federal Reserve’s most recent Beige Book summary, contacts from most bank districts reported modest economic growth to end the summer.
• Consumer spending on tourism was stronger than expected, though many expect the surge to trail off as the fall begins and consumer savings rates seemingly dwindle.
• Retail spending continued to slow, especially on non-essential items. New auto sales expanded in many districts, but this was more linked to increased inventory and availability rather than increased demand. The next edition of the Beige Book, due out in mid-October, will better reflect the impact of the recent United Auto Workers (UAW) strike, which began on September 15th.
• Manufacturing contacts across several districts noted improved supply chain activity and a better ability to meet existing orders, but most districts saw a decline in new orders over this period.
• Single-family homes were the one sector where supply did not increase, indicative of the significant inventory constraints the housing market has felt following its pandemic-era boom. Construction activity has risen in recent months, but several districts note that the construction of affordable housing units remains underwhelming relative to demand.

7. POTENTIAL ECONOMIC IMPACT OF UAW STRIKE

• On September 15th, the United Auto Workers initiated a strike against the three major unionized US car manufacturers, GM, Ford, and Stellatis—striking all three for the first time in history, with potentially significant short-term implications for the US economy.
• Beyond the implications for the manufacturers and their workers, downstream effects from the strike include potential car dealer shutdowns, exacerbating existing car inventory shortages, increased vehicle prices, and potentially widening bond market credit spreads.
• If prolonged, the strike could even influence mortgage rates, particularly in regions of Michigan and Ohio, where closed plants may result in a regional recession. Slower growth in these regions could send rates lower, benefiting homebuyers but potentially stoking inflation further. Income loss among workers may also affect local spending and home-price trends.

8. GOVERNMENT SHUTDOWN

• The prospects of a fourth Federal government shutdown in the last ten years were raised this week after Congress failed to agree on either a stopgap or permanent spending bill with an October 1st deadline swiftly approaching.
• The immediate impact of a government shutdown is mainly felt by Federal workers, who are often furloughed as a result, while others work with delayed pay, which can seep into local economic fundamentals.
• According to an analysis done by Pew Research, since the passing of the 1974 Congressional Budget Act—which outlined the modern structure of the appropriations process— Congress has only passed all its required appropriation measures on time four times. Further, there have been five government shutdowns since 1995.
• Typically, Congress relies on continuing resolutions (CR) to buy itself time to address legislative budget gridlocks, which usually extend funding levels from the prior year for existing programs. However, it is unclear if Congress can rely on a CR this time, as the current difficulty preventing an agreement surrounds a push by some House members to enact deep spending cuts to existing programs.

9. CRE OFFICE LOAN MATURITIES

• Out of roughly $1.1 billion in office loan balances that had original maturity dates in August, only 7.7% were reportedly paid off, according to a recent analysis by Moody’s Analytics.
• The analysis notes that declining payoff rates are explained mainly by the underlying performance of maturing loans rather than a deterioration in the ability of stronger-performing loans to complete payoffs. According to Moody’s Analytics data, 70% of the August loan maturities had “significant lease rollover” and debt yields below 8%.
• Looking at the payment status of loans set to mature in 2023 but did not pay off, 40% continue to make monthly payments, while 60% are non-performing.

10. PRODUCER PRICE INDEX: IMPLICATIONS FOR RETAIL

• A new analysis by Trepp notes that a significant surge in the Producer Price Index (PPI) in August may add pressure to consumers whose spending has kept retail margins afloat in the face of rising interest rates.
• According to the BLS, the PPI for final demand goods rose by a seasonally adjusted 0.7% in August — 30 basis points above its July rise and the largest month-over-month increase since June 2022.
• The increase in wholesale prices significantly outpaced advanced forecasts by WSJ economists and signaled a persistence of production cost pressures on manufacturers. According to Trepp’s analysis, this may further increase acquisition and sell costs for sellers, resulting in compressed Retail NOI and revenues.

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230920a1.htm#:~:text=The%20Board%20of%20Governors%20of,%2C%20effective%20September%2021%2C%202023
• (2) https://www.conference-board.org/topics/consumer-confidence
• (3) https://www.census.gov/construction/nrs/current/index.html
• (4) https://www.chandan.com/independent-landlord-rental-performance-report
• (5) https://www.dallasfed.org/research/surveys/tmos/2023/2309
• (6) https://www.federalreserve.gov/monetarypolicy/beigebook202309.htm
• (7) https://www.npr.org/2023/09/15/1199673197/uaw-strike-big-3-automakers
• (8) https://www.pewresearch.org/short-reads/2023/09/13/congress-has-long-struggled-to-pass-spending-bills-on-time/
• (9) https://cre.moodysanalytics.com/insights/cre-news/ma-cre-office-loan-maturity-monitor-remainder-of-2023-looks-no-better/
• (10) https://www.globest.com/2023/09/25/new-ppi-concerns-put-the-retail-market-on-notice/

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.

Branding and property certifications are among the requirements that tenants and investors should consider, according to a top property manager.

Evaluating how well an office building is run may be a crucial but difficult assignment for both prospective tenants and potential investors. How can you tell if a building is being maintained to a level that will make it a pleasant place for your company to conduct business or a wise investment?

Javier Lezamiz, senior managing director and New York lead for Cushman & Wakefield’s asset services unit, was consulted by LoopNet to aid with the solution to that question. Lezamiz has overseen commercial real estate for close to 30 years. In his current position, he is in charge of 650 staff members who provide management services for more than 220 properties totaling around 47 million square feet of commercial space in New York City and on Long Island.

Maintaining control over loans enables lenders, investors, and real estate experts to recognize possible dangers and take quicker action.

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1. AI AND COMMERCIAL REAL ESTATE

• A recent article by MSCI Real Capital Analytics suggests that despite the growing concern about AI’s potential impact on commercial real estate, a balanced view should be taken that considers both the economic risks of AI and its potential positive impact on productivity.
• The authors argue that AI could advance economic productivity, leading to higher incomes and increased CRE demand over the long run. Data from MSCI RCA shows that, generally, as a country’s economic output per worker (a standard measure of productivity) increases, so does the value of a country’s
  commercial real estate assets.
• Like earlier periods of technological advancement, the dawn of AI may increase structural unemployment in the short term but create demand for new knowledge and skills, which effective federal education and training policies can aid.

2. RETAIL THEFT HITS MARGINS, FOOT TRAFFIC RISES

• In its Q2 earnings report, Dick’s Sporting Goods’ cited retail theft as a critical factor compressing profit margins, shaking equities in the sector this week. While not cited as a primary factor, the report highlights a widespread issue facing many retailers as some US cities see a spike in thefts.
• It is yet to be determined how this may affect Retail real estate. Still, falling investor confidence in the consumer sector could trickle down to commercial activity if businesses delay expansion plans as a result.
• So far, however, retail foot traffic continues to increase and serve as a positive force for valuations, helping offset the impact of rising “shrink” rates.

3. MULTIFAMILY, A BRIGHT SPOT FOR CRE

• Multifamily has continued to be a bright spot for commercial real estate even in the face of higher interest rates and falling home affordability, as detailed in a recent Mortgage Professional America (MPA) analysis.
• While new supply has hit apartment rents, from a loan perspective, the piece argues, the sector continues to perform well compared to when they were initially financed.
• According to data cited in the analysis, the average 10-year increase in value of a multifamily asset stands at roughly 160% and was underwritten in a lower interest rate environment, amplifying returns.
• Contrarily, more recently purchased assets haven’t seen the same levels of appreciation as rates climb. While this is a downside risk for the sector, it represents a smaller share of total assets than those last transacted before the Fed’s tightening cycle, tempering the risk.

4. WARNING SIGNALS FOR CONSUMER DEMAND

• Demand for manufactured goods and services weakened in August, according to the latest data from S&P Global’s US Composite PMI Index. From July to August, business activity saw its most significant drop since November 2022 despite growing for the seventh consecutive month.
• Consumer spending has largely shaken off the effects of inflation and falling sentiment, which has catalyzed the recent quelling of recession fears. However, August’s data registered worse than expected and could be a leading indicator of an upcoming fall in consumption. New business and orders fell across all sectors, while new business in the service sector fell for the first time since February.
• Standing out in the survey was a fall in service demand, which has recently propped up consumption and, by extension, economic growth, as goods consumption has fallen from pandemic highs. The fading impact of service-led growth may hamper GDP. Still, it would be a welcomed sign for the Federal Reserve, which has frequently cited services inflation as a persistent barrier to reducing economy-wide price pressures.

5. NEW HOME SALES CLIMB

• Sales of new single-family homes in the US increased 4.4% annually to a seasonally adjusted annualized rate of 714,000 in July, according to the US Census Bureau.
• July’s increase was the largest year-over-year increase since February of last year and beat consensus market expectations.
• Sales in the US Midwest region saw the highest year-over-year growth rate during the month, climbing by 74.4% to 84,000. Meanwhile, the West region saw the largest overall total transactions over the past 12 months, registering 181,000 sales while climbing 21.5% year-over-year.
• Sales in the South declined by 6.3% year-over-year, while sales in the Northeast dropped by 2.9%.
• The median price of a new single-family home sold was $436,700 in July compared to $478,200 one year ago.

6. CRE’S IMPACT ON BIG CITY BUDGETS

• Diverging trends in the commercial real estate industry make it challenging to forecast fiscal consequences for local governments, but a recent analysis by the Tax Policy Center notes that most US cities saw an increase in their property tax base between 2019 and 2022, though this may be a lagging indicator.
• A separate analysis by GreenStreet estimates that, on average, CRE values, while down over the past year, are roughly on par with those registered in early 2018. While falling valuations present a risk to city budgets, pandemic-era value increases provide many cities a fiscal floor for impending falls in tax revenues. However, how this translates into fiscal health largely depends on local policies and priorities.
• According to analysis, Boston maintains the highest reliance on commercial property tax revenue, which accounts for close to 36% of its total general revenues. Dallas is second, with property taxes accounting for 26% of revenues, and Atlanta is third, with 19%.
• Conversely, Phoenix relies the least of any large metro on property tax revenues, accounting for just 3% of total general revenue, with Chicago second at 7% and Charlotte at 3rd with 8%.

7. US ECONOMY LIKELY INSULATED FROM CHINA CRE TROUBLE

• The recent bankruptcy filing by China Evergrande, a property giant in China, has raised concerns about potential economic stagnation in America’s third-largest trading partner and how it may affect the economy at home. However, the US economy will likely be insulated from the worst effects of the crisis.
• For starters, one consequence of the US/China trade imbalance is that Chinese purchases of US goods and services account for less than 1% of US GDP. If Chinese commercial real estate markets falter and the nation’s growth declines, it will likely have a muted impact on US business activity.
• For further context, consider the potential trouble brewing in US CRE markets. The office sector, which has been the focus of increasing concern in recent months, is currently valued at $2.5 trillion, according to the Bureau of Economic Analysis. In comparison, total US investment in China (including Hong Kong) stands at just $515 billion. Therefore, domestic concerns should weigh heavier for US investors than China-based ones.
• However, if the Chinese economy tips into an extended period of deflation, a weaker yuan may lower the relative costs of Chinese goods abroad, a potential counterweight to US inflation.

8. JACKSON HOLE SUMMIT

• As the world’s top economists and policymakers descend on Jackson Hole, WY, for its annual summit, Federal Reserve officials are expected to express a more dovish tone compared to 2022 when Fed Chair Powell warned that a recession may be needed to calm post-pandemic inflation.
• In recent days, some officials have signaled that the central bank may be close to finished with its tightening cycle, with Philadelphia Fed President Patrick Harker referring to current rate levels as “restrictive,” a more pointed term than typically used in recent statements by officials.
• Still, as put by Jason Furman, an economist at Harvard, Powell is not expected to boast in a “mission accomplished” tone as he speaks to his peers this week and may suggest that there is more work ahead. However, many expect Powell to refrain from the spookier language compared to 2022, when officials aimed to realign Wall Street expectations on the inflation fight.
• A new point of intrigue for Jackson Hole watchers will be economists’ reaction to an unexpected rise in US economic growth and a fall in recession fears. Particularly, onlookers will look to gauge whether the latest data signals that policymakers will keep interest rates higher for longer.

9. RETAIL SALES CLIMB

•  According to the latest data from the Census Bureau, US retail sales were up 0.7% month-over-month in July.
• Retail sales beat the market consensus forecast of a 0.4% increase and followed an upward revision of June’s data. This is the fourth consecutive month where sales have increased.
• Amazon Prime Day may have boosted July sales, with nonstore retailers recording the largest monthly increase across all subtypes, up 1.9%. The category of sporting goods, hobbies, musical instruments, and books rose by 1.5% in the month, followed by food services and drinking places (1.4%).
• The most significant monthly decreases in sales were seen in furniture stores, falling 0.8%; health and personal care, falling 0.7%; and building materials and garden equipment, falling 0.7%.

10. JOBLESS CLAIMS FALL

• Initial unemployment claims fell by 10,000 to a seasonally adjusted 230,000 during the week ending on August 19th, the latest data available from the US Labor Department.
• While jobless claims rose to start the year as the Fed’s monetary tightening began to raise costs for businesses, leading to some layoffs, the labor market has so far avoided a major shock.
• The number of continuing unemployment claims, which represent those receiving benefits for more than one week and a valuable barometer for hiring levels, also fell by 9,000 during the week, landing at 1.70 million.
• The simultaneous forces of a strong labor market, falling inflation, and a recent increase in capital spending have prompted many economists to revise upward their GDP expectations for the year, according to comments by Reuters.

SUMMARY OF SOURCES

• (1) https://www.msci.com/www/blog-posts/do-not-fear-the-impact-of-ai-on/04017862827
• (2) https://www.marketwatch.com/story/dicks-sporting-goods-said-retail-theft-hit-margins-this-issuehit-them-harder-a6634d50
• (3) https://www.mpamag.com/us/specialty/commercial/why-the-commercial-real-estate-landscapeis-both-bright-and-dark/457374
• (4) https://www.pmi.spglobal.com/
• (5) https://www.census.gov/construction/nrs/current/index.html
• (6) https://www.taxpolicycenter.org/taxvox/future-commercial-real-estate-and-big-city-budgets
• (7) https://www.nytimes.com/2023/08/21/opinion/columnists/china-financial-crisis-economy.html
• (8) https://www.bloomberg.com/news/articles/2023-08-24/bullard-says-reaccelerating-us-economycould-prompt-higher-rates#xj4y7vzkg
• (9) https://www.census.gov/retail/sales.html
• (10) https://www.dol.gov/ui/data.pdf

The industrial sector is the least impacted.

1. INTEREST RATE OUTLOOK

• Despite the Federal Reserve’s decision to hold rates constant at their June meeting, current market forecasts project an 81.8% chance that the FOMC will move forward with a 25-basis point hike in July, according to the Chicago Mercantile Exchange’s Fed Watch Tool.
• In June, officials placed their year-plus hiking cycle on pause in an effort to evaluate the success of their tightening effort thus far. Earlier in the month, national employment data registered stronger than expected, while annualized inflation continued to trend downwards.
• With recession concerns still pertinent, the Fed opted to pause and digest incoming data. At the same time, some officials have signaled a preference for further rate hikes to anchor longer-term inflation expectations. Notwithstanding recent deceleration, Real PCE, the Fed’s preferred inflation gauge, remains
  well above the central bank’s 2.0% target.
• In recent days, Fed Chair Jerome Powell indicated that “there’s more restriction coming,” acknowledging that despite the committee’s decision to pause last month, he and other members “expect the moderate pace of interest rate decisions to continue.” While not outright saying that they expect rate hikes to continue, the statement signals the Fed won’t hesitate to move forward with a hike if the data warrants it.

2. HOME PRICES

• Home prices fell annually for the first time since April 2012, declining 1.7% year-over-year in April, according to the S&P/Core Logic Case-Shiller Home Price Index.
• Market forecasts for the Case-Shiller projected a 2.6% annual decline during the month. Despite the steepest annual drop in over a decade, monthly data suggest that home value declines may have hit a cyclical nadir in recent months, as home prices were up 1.27% from March. Between June 2022 and January 2023, home prices fell in each month before turning positive again in February.
• Seattle and San Francisco continue to experience deep year-over-year declines, while several other markets, including Miami, Chicago, Atlanta, and Charlotte, are experiencing modest single-digit growth.
• The southeast continues to be the strongest region for home price growth, averaging 3.6% year-overyear. The west remains the weakest, falling -6.9% over the past 12 months.

3. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time payment rate in independently operated rental units declined for the third consecutive month in June, falling to 82.5%. Despite the recent retreat in on-time rates, compared to one year ago, the on-time payment rate remains up by 118 basis points compared to a year earlier.
• These data underscore how the rental housing sector has fended off widespread distress while headwinds mount elsewhere in the market. According to MSCI Real Capital Analytics, through May 2023, apartment prices are down 13.8% from their 2022 peak. Additionally, borrowing terms remain stringent as banking sector volatility and high-interest rates impact the attainability and feasibility of debt financing.
• Nevertheless, the continued performance of rental units amid a still resilient labor market is allowing independent operating landlords to withstand the economic malaise. As units maintain their monthly rental payments, the cash flow ecosystem between tenants, operators, and lenders stays intact.
• The June 2023 forecast full payment rate is 91.6% — just 44 bps below its post-covid peak.

4. REGULATORS SOUND THE ALARM ON CRE

• In recent weeks, US regulators have asked major lenders to work with credit-worthy borrowers facing stress in the commercial real estate market.
• The statement arrived from the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the National Credit Union Administration, who urged them to work “prudently and constructively” with good clients.
• The outreach comes amid rising concerns about the stability of commercial real estate as lending standards tighten and property values absorb a testing demand outlook.

5. SELLOFF IN CRE STOCKS MAY PRESENT OPPORTUNITIES

• Portfolio manager Jeffrey Kolitch of Baron Funds, a publicly traded fund that manages close to $1.5 in real estate assets, recently expressed his belief that recent stock selloffs in the sector present investors a “gift,” proving some an opportunity to acquire high-quality companies at “attractive” prices.
• At a recent talk, Koltich expressed his disagreement that we are on the cusp of a CRE crisis and his belief that setup for real estate in public markets is bullish. He emphasized the flurry of headwinds that the industry has faced in recent years, including the pandemic and generational shifts in consumer preferences, and how the industry has proven to remain innovative and efficient in the face of them.
• Further, he believes the rising fears surrounding the industry have caused stocks in the sector to fall steeper relative to the broader market, presenting attractive pricing to looking for upside in the public markets.

6. MEASURING UP OFFICE DEVALUATIONS

• A recent CRE Moody’s Analytics analysis explored some of the worst-case scenarios for the office sector by setting out to answer the question: what does it take to see a peak-to-trough Office value decline of 40%?
• The analysis notes that a 40% peak-to-trough decline would require current levels of distress to worsen and sustain. Between Q1 2022 and Q1 2023, office property values have declined nationally by an average of 12.7%. Prices would need to fall by another 31.3% from current levels to reach the 40% aggregate devaluation threshold.
• According to the authors’ calculations, to see office valuations drop by another 31.3% nationally, it would require that occupancy rates fall by an average of 3.8% from current levels and an NOI drop-off of 24.5% from current levels.
• The analysis notes that while the above scenario will likely play out in some properties, “the chances we see broad office declines at this level is on the tail end of the distribution of possibilities, as opposed to the expected case.”

7. RENTS DECLINE

• According to Realtor, May rents on 0–2-bedroom apartments fell -0.5% year-over-year through May, marking the first decline since they began tracking the segment in 2020, signaling a potential shift in the market cycle.
• Smaller units saw rents increase over the year, with studio apartments up 2.0% in the past 12 months and one bedroom up by 0.4%. The retreat in rents was driven by two-bedroom units, which have declined by 0.5% year-over-year.
• The median asking rent in the 50 largest US metros rose by $3 from April but is down $38 from its July 2022 peak.
• Rents in the West are falling steeply, down -3.0% year-over-year, while markets in the South have seen an average decline of -0.7%. Rents in the Midwest continue to climb but are slowing, rising 4.5% in the past 12 months.

8. THE FIVE TIGHTEST RENTAL MARKETS IN THE US

• According to recent research from Chandan Economics and Arbor Realty Trust, the five tightest rental housing markets in the US today are Cape Coral, Louisville, Boston, Knoxville, and Worcester. The scoring matrix relied on two factors: rent growth and occupancy.
• Cape Coral, FL, which had the country’s most intense rent growth pressures through April, has seen its profile rise as a retiree destination. Meanwhile, Louisville and Knoxville have gained in recent years as their combinations of urbanized downtowns and housing affordability have attracted new residents.
• In Massachusetts, Boston’s market tightness appears primarily due to supply-side factors, including the market response to the municipal government’s push to implement rent control. At the same time, Worcester is gaining from demand-side factors as its downtown revival attracts residents away from Boston.

9. MIXED USE MALLS

• Some developers are turning to a mixed-use approach to salvage the value of struggling big-box retail space, specifically by combining a variety of smaller retail tenants with residential properties mixed in.
• For instance, many investors owning property at former Sears locations are now converting them into experimental “live, work, and play” environments, reflecting a trend to revitalize malls and adapt to changing consumer preferences.
• Sears, a retailer with a formerly sizeable national footprint, has just 12 department stores remaining nationwide following a Chapter 11 bankruptcy filing and the effects of the pandemic’s “retail apocalypse.” During the proliferation of malls in the 1960s, Sears positioned its auto center adjacent to mall parking lots where their department stores were typically located.
• As a result, properties that formerly housed these connected retail sites are in a unique position to accommodate such a mixed-use approach and may serve as a template for investors looking to implement such a strategy. The new strategy focuses on residential, retail, and other amenities.

10. NET LEASE INVESTING

• For net lease investors, the recent pause in rate-hikes may signal an easing of cap rate expansion, but the likelihood of additional rate increases in the coming months means that investors should brace for further cap rate increases before normalizing in 2024.
• Even if the Fed’s tightening cycle halts and rates remain neutral for the foreseeable future, lending conditions and risk appetites will likely remain restrictive in the near term.
• Those with cash-on-hand, who can secure long-term lease deals with creditworthy tenants—alongside the proper due diligence processes to execute those deals—should be able to proceed with investment plans despite the lending pullback.
• However, smaller deals will have an advantage in this environment, as larger players with more significant targets may be forced to stay in wait-and-see mode until demand unsticks.

SUMMARY OF SOURCES

• (1) https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
• (2) https://bit.ly/44unGBr
• (3) https://www.chandan.com/independent-landlord-rental-performance-report
• (4) https://www.bloomberg.com/news/articles/2023-06-29/us-asks-lenders-to-help-firms-withcommercial-real-estate-stress?srnd=markets-vp#xj4y7vzkg
• (5) https://www.barrons.com/articles/real-estate-stocks-selloff-ac3cb792
• (6) https://cre.moodysanalytics.com/insights/cre-news/capital-market-quick-take-what-does-it-taketo-see-a-peak-to-trough-office-value-decline-of-40/
• (7) https://www.realtor.com/research/may-2023-rent/
• (8) https://arbor.com/blog/the-top-five-tightest-rental-markets-in-the-u-s/
• (9) https://www.globest.com/2023/06/29/vacant-sears-stores-find-new-life-as-housing-in-mixeduse-malls/
• (10) https://www.globest.com/2023/06/29/what-does-the-feds-breather-mean-for-net-leaseinvestors/

SVN | VANGUARD is pleased to announce the addition of Eric Lambiase to our SVN Southern California team. Lambiase brings over 25 years of successful transaction experience representing both regional and national tenants and landlords. As Senior Vice President at SVN, Eric will assist in leading our Retail effort in both landlord and tenant representation, said Managing Director, Cameron Irons.

1. FED MEETING MINUTES

• Minutes from the FOMC’s May 2-3 policy meeting showed that central bank policymakers were split on the decision to continue raising interest rates or pause increases during its most recent vote.
• Ultimately, the decision to raise rates by 25 basis points in May was unanimous. However, the minutes signal that officials are taking an increasingly balanced approach to fighting inflation as their tightening efforts gradually show their impact on the US economy.
• While some officials have signaled openness to a pause, most have also reiterated that the committee is not “done” in its fight against inflation, and their decisions remain data dependent. Other officials remain aggressive in stamping out recent price pressures, believing that rate hikes should continue to anchor
  future inflation expectations.
• According to the Chicago Mercantile Exchange’s Fed Watch Tool, there is a 66% chance that the Fed will pause rate hikes at its June policy meeting.

2. DEBT CEILING NEGOTIATIONS

• President Biden and House Republicans appear to be inching closer to a bipartisan deal to avert a looming debt-ceiling limit, according to senior aides from the White House and Speaker Kevin McCarthy.
• Talks have intensified in recent days as a projected early-June fiscal cliff approaches, and a deal that satisfies both sides of the aisle remains elusive.
• The Treasury Department estimates that the US could run out of money as soon as June 1st, which economists warn could potentially upend the global financial system and send the economy into recession.
• On May 24th, Fitch, a rating agency, placed the US Government’s “AAA” credit rating on negative watch, signaling that partisan disputes have threatened the standing of US creditworthiness.
• House Republicans are seeking significant cuts to discretionary spending before agreeing to raise the debt limit. The White House and Congressional Democrats initially looked to pass a clean increase without cuts but recently agreed to freeze spending at current levels for the following year.
• It is expected that both sides will need to compromise to pass legislation through the Republican-controlled House and Democrat-controlled Senate.

3. HOW A US DEFAULT COULD IMPACT CRE

• If no deal is reached in Washington and the US defaults on its debt, the result will have far-reaching effects on parts of the global economy, with commercial real estate among them.
• US Treasury values would fall, creating upward pressure on mortgage yields and other market interest rates. According to the Mortgage Bankers Association, this process has already begun to play out simply based on the growing possibility of default. In recent days, default fears appear to have pushed mortgage rates up and resulted in a decline in purchase applications.
• The recent banking crisis would also likely intensify, as recent distress was mainly due to an oversaturation of treasuries on the bank’s balance sheet that was not hedged for the risk of rising interest rates. If a default were to cause even further upward pressure on rates, banks that have avoided issues during the Fed’s rate hikes might get thrust into distressed positions. This could significantly dry up financing for CRE projects.
• A debt ceiling crisis would immediately delay deals, and prices would initially fall in the wake of a default. However, opportunistic buyers may swoop in during this time, as seen during the early days of the pandemic, and create some market demand.

4. BANK SHARE OF CRE DEBT

• As small and mid-sized banks face new challenges, there have been increased concerns around their foothold in commercial real estate debt markets. However, a study by Moody’s Analytics suggests that while smaller banks have grown in market-share recently, they are far below the “65-70%” number thrown
  around by some recent doomsday-like analysis.
• According to Moody’s estimates, banks account for 38.6% of CRE lending, while mid-sized regional banks, of which there are 135 nationwide, account for just 13.8% of CRE debt.
• The nation’s top-25 largest banks hold 12.1% of CRE debt, while the 829 community banks hold 9.6% of CRE Debt.
• As noted in the Fed’s most recent Senior Loan Officer Opinion Survey (SLOOS), most lenders tightened credit standards during the first quarter of 2023, which could reduce some financing options for the CRE market. However, Moody’s notes the CRE debt market is large and diverse, and several non-bank lenders such as insurance companies, mortgage REITs, and others could step in to fill the gap.

5. Q1 GDP SECOND ESTIMATE

• The Q1 US GDP estimate was revised from a 1.1% annualized rate to 1.3%, according to the latest data from the Bureau of Economic Analysis.
• The upward revision reflected a smaller decrease in private inventory investment than previously estimated, while consumer spending accelerated more than expected (3.8% compared to the previous estimate of 3.7%). The upward revision in spending is notable given rising financing costs and inflation that, while cooling, remains high by historical standards.
• Non-residential fixed investment was also revised upward to 1.4% annualized versus a previously estimated 0.7%, while government spending was revised up to 5.2% annualized compared to the 4.7% previously estimated. Residential fixed investment shrank more than previously estimated.
• Despite the upward revision, Q1 2023 remains the slowest quarter for growth since Q2 2022, though a US recession appears to have so far been avoided.

6. NEW AND EXISTING HOME SALES

• Sales of new single-family houses rose to a seasonally adjusted annual rate of 683,000 in April, according to the Census Bureau, 4.1% above March’s pace and 11.8% above the April 2022 level. For sale inventory currently has 7.6 months of supply.
• The median sales price for a new home sold in April was $402,800.
• Meanwhile, according to the National Association of Realtors (NAR), existing-home sales declined by 3.4% in April to a seasonally adjusted annual rate of 4.28 million. Sales were down 23.2% from one year ago.
• The median existing-home sales price fell 1.7% in April to $388,800.

7. EMERGING TRENDS IN DINING

• At the recent ICSC conference in Las Vegas, dining experts convened for a session to discuss emerging trends in the food and beverage industry, including the evolution of consumer behavior and its impact on retail real estate.
• Speaking about plans to expand their “Dave’s Hot Chicken” brand, SVP of Real Estate Dannon Shiff explained that the ideal space for his brand includes daily necessities, possesses high visibility, has ample parking facilities, and presents a significant signage opportunity.
• Patrick Chamberlain of Hart House spoke about the need for location relative to local trade areas, where travel guests or employees seek lunch and dinner options. Their brand is eyeing both urban and suburban locations for expansion, noting that the remote work shift has led to reevaluations of local trade hot spots.

8. CONSUMER SENTIMENT

• US consumer sentiment fell to a six-month low of 57.7 in May 2023, down from a reading of 63.5 in April, according to data from the University of Michigan.
• Survey forecasters had projected a reading of 63 in May, but a recent deterioration in expectations about the economy’s future trajectory led to steeper declines.
• The expectations sub-index fell to 53.4 in May from 60.5 during the month prior. The current economic conditions index fell from 68.2 to 64.5.
• Year-ahead inflation expectations fell slightly to 4.5% from 4.6% in April.
• According to survey director Joanne Hsu, recent negative news stories, including the debt ceiling standoff and banking crisis, may have led to the fall in sentiment in recent weeks.

9. PENDING HOME SALES

• Pending home sales, meanwhile, remain steady. According to the NAR, pending home sales remained unchanged from March at an index reading of 78.9 in April.
• Pending transactions remain down by 20.3% year-over-year. According to NAR Chief Economist Lawrence Yun, limited inventory has prevented some buying interests from being met, while affordability challenges “continue to hold back singings.”
• The highest activity level occurred in the South and Midwest regions, respectively. The northeast region saw the lowest activity levels, followed by the West region.

10. HOUSING PERMITS AND STARTS

• Building permits fell 1.5% from March to April, registering a seasonally adjusted annual rate of 1.41 million homes in April, down from 1.43 in March, according to the Census Bureau. Permits are down 21.1% year over- year.
• Housing starts rose 2.2% month-over-month in April to 1.40 million— up from 1.37 million. However, starts remain 22.3% below their April 2022 level of 1.80 million.
• Housing completions fell 10.4% in April to 1.37 million, down from 1.53 million. However, completions are 1.1% above their April 2022 level of 1.36 million.

SUMMARY OF SOURCES

• (1) https://www.federalreserve.gov/monetarypolicy/fomcminutes20230503.htm
• (3) https://www.realtrends.com/articles/how-the-debt-ceiling-crisis-could-derail-the-real-estatemarket/
• (4) https://cre.moodysanalytics.com/insights/cre-news/whats-the-real-situation-with-cre-and-banksdoom-loop-or-headline-hype/
• (5) https://www.bea.gov/
• (6) https://www.census.gov/construction/nrs/pdf/newressales.pdf
• https://www.nar.realtor/newsroom/existing-home-sales-faded-3-4-in-april
• (7) https://www.globest.com/2023/05/23/industry-experts-talk-dining-trends-and-real-estate-aticsc/
• (8) http://www.sca.isr.umich.edu/
• (9) https://www.nar.realtor/newsroom/pending-home-sales-recorded-no-change-in-april
• (10) https://www.census.gov/construction/nrc/pdf/newresconst.pdf