Archives for May 2023

Residual Covid-19 Ripples Still A Significant Factor for CRE

Worker Shortage Shrinking, But Far From 2019 Level

• There are 9.6 million job openings in the economy, roughly 2.5 million higher than in 2019
• The shortage will impact business’ ability to grow while reinforcing upward wage pressure and remote work practices

Rethinking Supply Chains In the Long-Term

• While supply chain frictions have eased, a shift toward bringing production closer to U.S. consumers occurred
• This will most directly impact industrial properties, but will aid other property types through job creation

Behavioral Changes Accelerate Shift to Suburbs

• Apartment, retail, and office vacancy rates are lower in suburban areas nationally than CBDs in 1Q 2023
• This trend is supported by both a large population of millennials aging into prime family formation years, and an uptick in marriages after the pandemic

*Through April; Job openings through March
Sources: Marcus & Millichap Research Services, BLS

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Where CRE Fundamentals Stand And What It Means For Investors

Opportunity Exists In CRE, Even In Hard-Hit Sectors

• Local market dynamics can outweigh strong macro trends; some markets have stable or improving office vacancy rates, despite broad-based headwinds
• Opportunities in impacted CRE segments highlight the importance of looking beyond national trends

Retail and Industrial Outperforming as Sectors

• The multi-tenant retail sector now has vacancy below the 1Q 2020 level in 24 major U.S. markets
• Industrial properties are also recording lower vacancy in 40 of 48 tracked metros, spurred by 52 consecutive quarters of positive net absorption

Investors Should Look Beyond The Headlines

• All property types have locations, segments, and asset types that have exceeded national performance trends
• Opportunities exist in the market despite economic headwinds if investors stay alert and active

*From 1Q 2020 to 1Q 2023
Sources: Marcus & Millichap Research Services, CoStar Group , Inc., RealPage Inc

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What Emerging Workforce Trends Mean for Investors

Labor Market Still Showing Signs of Strength

• The unemployment rate in April fell back to 3.4 percent, while the labor shortage fell to 3.7 million
• A decrease in immigration and of older workers in the labor force are helping sustain the shortage

Diminishing Wage Pressure To Aid Inflation Fight

• Despite the shortage of workers, wage growth has fallen off recent highs to 4.3% annually
• Construction wages are 15.3% higher than before the pandemic, creating additional delays in construction

What This Means For Investors

• As wage growth is a major concern of the Fed, a slowdown may signal that it is time to pause rate hikes
• Certainty in the interest rate climate would help investors, developers and lenders achieve stable financing outcomes on projects and plans

*Through April; job openings through March
Sources: Marcus & Millichap Research Services, BLS

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What The FED Meeting and Banking News Means For Investors

Federal Reserve Raises Rates But Changes Tune

• The Federal Reserve once again raised the overnight rate by 25 bps at the May meeting, to 5.00%-5.25%
• Language in The Fed’s press release suggested the Fed is entering a “wait-and-see” approach as opposed to expecting additional hikes

Regional Banks Still Face Risks As Major Sale Occurs

• After customers withdrew $100B in Q1, First Republic Bank was seized by regulators and auctioned to JPMorgan Chase
• 61% of First Republic’s lending was in SF housing, 13% was multifamily and 6% was other CRE

Rate Stability To Aid Lenders and CRE Investors

• If the Fed stops raising rates, lenders and banks can begin to stabilize their lending standards
• Long-term demand drivers remain sound for the majority of CRE types

*Through May 04
Sources: Marcus & Millichap Research Services, Federal Reserve, CME Group

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Perception Gap Emerging in the CRE Market

Economic Indicators Show Strength Despite Recession Risk

• 1Q GDP data shows a 1.1% annualized growth rate in 2023, in line with the Blue Chip consensus forecast of 1.2% this year
• The U.S. economy also added more than 1 million jobs in the first 3 months of 2023, despite high-profile tech layoffs

KPI’s Are Strong for Most Asset Types

• When compared to pre-pandemic averages, most property types are recording stronger fundamentals in 2023
• Annual rent growth through 1Q exceeds the pre-pandemic average for all the major asset types besides office, with retail and industrial vacancy also lower in 1Q 2023

Office Presents Headwind, But Overall Outlook Bright

• Office vacancy is up nearly 370 basis points from its 1Q 2019 level, with rent growth below the pre-pandemic average
• The perception of a broad-based CRE reset being pushed by the media does not align with the current data, forming the perception gap in the market

*5-year period from 2015-2019; ADR growth for hotel
Sources: Marcus & Millichap Research Services, CoStar Group, Inc, RealPage, Inc.

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