Limon Net Lease Group

Research Brief

Has the FED Finally Reached a Tipping Point

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IS THE FED FINALLY WILLING TO CUT INTEREST RATES?​

Inflation Moving Towards 2% Target​

  • New data last week shows CPI and Core CPI continued to trend lower (to 3.0% and 3.3% respectively)​
  • Although these levels are still above the target, the Fed wants Core PCE at 2%, the trends remain very positive​

Economic Trends Suggest Pace Of Growth Is Flattening​

  • Chairman Powell has noted the softening of the employment market, with the unemployment rate creeping higher​
  • Loosening labor markets, flat inflation-adjusted retail sales, and other economic trends suggest economic growth is slowing​

Investor Perspective Beginning To Shift​

  • Investor sentiment is beginning to rise as the likely of rate cuts this year increases​
  • Elevated rates have created unique opportunities for investors stemming from conflicting economic expectations​
  • The consensus forecast still calls for a Soft-Landing​

*Core CPI through June; Core PCE through May​
Sources: Marcus & Millichap Research Services, BLS, BEA​

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How Changing Behavior is Reshaping CRE

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WHAT SHIFTING MIGRATION TRENDS MEAN FOR CRE PERFORMANCE​

Population Migration Slowing After Post-Pandemic Bounce​

  • The number of monthly movers has fallen to near zero in the summer of 2024 ​
  • This is a slowing of record levels of population movement from coastal states to Sunbelt states from 2020-2023​

Developers Assumed Migration Would Continue​

  • Development pipelines in Sunbelt areas, that grew the most quickly since 2019, are near record highs for 2024​
  • These metros could see vacancy rise in the near-term as new builds come online and inbound migration cools​

Coastal and Midwest Construction Near All-Time Lows​

  • As developers looked at demographic shifts, new inventory expected to complete in places like California and the Midwest​
  • This creates an opportunity in some of the least discussed metros in the country if investors maintain long-term outlooks​

*Through April ​
Includes New York, Los Angeles, The Bay Area, and Chicago​
Sources: Marcus & Millichap Research Services, Placer.AI​

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Get ahead of the FED – Why Inflation Isn’t as High as People Think

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WHY TRUE INFLATION MAY BE LOWER THAN THE BLS IS REPORTING​

BLS Housing Data Out Of Alignment With Market Data​

  • The BLS uses “Owners Equivalent Rent” to estimate what homeowners would pay in rent in their dwellings ​
  • This survey rent data lags the market data observed by Zillow and RealPage by roughly a year​
  • This lag means CPI is being calculated with housing rent growth numbers over 5% in May 2024 ​

Market Data Would Show Inflation Closer To 2%​

  • If the Zillow data for SFR costs are substituted in the CPI calculation, the inflation rate falls from 3.3% to 3.0%​
  • Going one step further, if RealPage traditional rent growth data is used in place of the BLS survey rent numbers as well, CPI would fall further to just 2.6%​

Inflation Poised To Fall Quickly As Data Catches Up​

  • As the rent growth time lag plays out in 2024, it is likely inflation readings will approach the Fed target level of 2% quickly​
  • If 2% inflation is achieved it is likely the Federal Reserve will begin the process of reducing interest rates this year​

*Through May​
Sources: Marcus & Millichap Research Services, BLS, Zillow, RealPage, Inc.​

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Hard or Soft Landing? The Midyear Economic Outlook

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CRE AND ECONOMIC OUTLOOK FOR 2H 2024​

Economic Soft Landing Remains Baseline Scenario​

  • With inflation easing and other economic metrics sustaining slow growth, a soft-landing remains the most probably outlook​
  • A recession is possible if the Fed holds rates too high for too long, but they signaled a willingness to cut rates this year​

If There Is A Recession…​

  • The Fed would likely cut rates quickly and significantly​
  • But CRE fundamentals would likely weaken as space demand for all property types would weaken​

Space Demand and Investor Confidence Could Both Spike​

  • If the Fed begins its rate cutting cycle, it could reinvigorate confidence, causing companies to boost their expansion plans, resulting in increased CRE space demand​
  • Increased certainty, lower financing costs and strengthening CRE fundamentals could boost CRE investor activity

*Forecast as of June 10​
Sources: Marcus & Millichap Research Services, Blue Chip​

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Why the FED’s So Cautious About Cutting Rates

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FED DELIVERS KEY MESSAGE FOR CRE INVESTORS​

New Inflation Data Shifts to Positive Trajectory​

  • Following “bumpy” inflation readings that put rate cuts on hold, the downward inflation trajectory reasserted in May​
  • The CPI inflation reading released on June 12th showed CPI and Core CPI falling; Core CPI hit lowest level since April 2021​

Federal Reserve Signals Potential Rate Cut in 2024 ​

  • On the June dot-plot, fifteen of the nineteen members of the committee suggested the overnight rate will end this year lower than where it is today​
  • Wall Street has baked-in a 60% likelihood of a rate reduction coming at the September Fed meeting​

Federal Reserve Remains Cautious​

  • Although the Fed appears optimistic about the prospect of a rate cut this year, the messaging remains cautious and dependent upon future inflation and economic readings​
  • Chairman Powell stated that even one cut will be very consequential to financial markets, so they will only pull the trigger if they strongly believe inflation is under control​

*Through May​
Sources: Marcus & Millichap Research Services, BLS​

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