This Week’s Topics
ECONOMIC TRENDS
Fed Keeps Rate Unchanged
On March 19-20, 2024, the Federal Reserve met in its Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell announced that the Federal Funds rate, the interest rate that banks charge each other, will continue at 5.25% to 5.50%. This announcement came as no surprise to most analysts who believe rates will continue at this level until the second half of 2024.
The Fed is keeping rates high to slow the economy and provide a “soft landing” as they target the inflation rate at 2.0%. Inflation targeting is a central bank strategy of specifying an inflation rate as a goal and adjusting monetary policy to achieve that rate. The Fed is also using quantitative tightening to slow the economy. Quantitative tightening reduces the Fed’s balance sheet by either selling bonds or letting bonds mature. This removes liquidity from the financial markets.
The Fed expects three rate cuts this year which should drive rates down to 3.9% in 2025 and 3.1% in 2026. The Fed also expects unemployment to rise to 4% from its current level of 3.7%. GDP is expected to grow at 2.1%. “Inflation is sitting at 3.2% but we are wanting to move towards the 2.0 % target inflation rate without threatening the health of the economy,” said Powell. With energy and food prices continuing to rise at 4.45% and 1%, respectively, driving up both the Producer Price Index (PPI) and the Consumer Price Index (CPI) the jury is still out as to whether the Fed can achieve its target objective.
The Fed has FOMC meetings scheduled for May, June, July, September, November and December of 2024. Investors will have to wait and see if the Fed’s two-pronged approach of keeping interest rates high and using quantitative tightening to reduce liquidity in the market will have the desired effect. The Fed is holding $7.5 trillion in debt securities ($5 trillion in Treasuries and $2.5 trillion in mortgage-backed securities). They are selling a maximum of $95 billion in bonds and $35 billion in MBS each month, so we’ll see if this helps slow down the economy. For more information on the economy, check out our RealFacts® Weekly Economic Report.
REAL ESTATE
Industrial Sector Rebalancing
The industrial real estate sector is undergoing a period of adjustment from the days when the market was undersupplied. In the wake of the COVID-19 pandemic, the industrial sector experienced rapid expansion due to e-commerce and the preference for home delivery, but now it is facing a “cooling trend.” In 2023, industrial net absorption totaled 93.7 million square feet, which was significantly below the record-high completions of 486.6 million square feet. Look for a period of adjustment characterized by slower growth and a return to a balance in supply and demand.
Construction Material Costs Down, Labor Costs Up
Even with the normalization of supply chain issues in the construction industry, there is still concern over rising construction costs. Inflation’s impact on project budgets has challenged conventional assumptions. While material prices, including steel and lumber, have retreated from their record highs, direct labor costs and subcontractor prices continue to increase, putting significant pressure on project budgets. Average hourly earnings for construction employees have grown at 5.7% as of June 2023. The dynamics of the construction industry point toward continued upward pressure on labor costs.
Rental Rates Stabilizing In The Midwest
After a six-month decline in rental rates from August 2023 to January 2024, median rents in the U.S. are showing signs of a rebound. In March 2024, rents ended up by 0.2% to reach $1,377 per month. Despite the recent uptick, rents remain down by 1% compared to the previous year. Moreover, vacancy rates have climbed to their highest level since September 2020 reaching 6.6%. Among the metro areas experiencing significant growth include Milwaukee, Memphis, Cleveland, Tulsa, Grand Rapids, Miami, and Honolulu. Conversely, Sunbelt markets have exhibited slower growth trajectories. San Francisco still ranks as the slowest metro over the past three years, even while posting a 9% growth rate.
Apartment Rent Growth In West Lags Behind Northeast, Midwest, and South
RealPage reported that apartment rent growth in the Western U.S. lagged behind the rest of the nation. This is the first time since 2015 that average effective rents in the West have trailed those of the Northeast. Average rents, as of February 2024, were $2,221 in the Northeast compared to $2,204 in the West. Over the last 4 years, rent growth in the West grew about 20% while rent growth in the other three regions (Northeast, Midwest, South) grew at 29%. The national average is 25.5%.
Biden's Comprehensive Housing Plan
Keep an eye on President Biden’s comprehensive housing plan which garnered support from the National Association of Home Builders (NAHB). The plan provides a $10,000 tax credit for first-time homebuyers and provides a $25,000 Low-Income Housing Tax Credit which can help offset the down payment. Conversely, the NAHB cautions against a “one-size-fits-all” approach which could hinder state-specific regulations. Another trend in tackling the affordable housing crisis is developers bypassing government-backed initiatives and working with private funding sources to provide funding. Private developers are demonstrating that they can build these projects at half the cost of the government-funded projects.
CRE Debt Maturing Creating Opportunities
The commercial real estate market is bracing for a period of heightened volatility and uncertainty due to the impending maturity of CRE debt. Federal Reserve Chair Jerome Powell noted that a significant portion of CRE debt is set to mature in the coming years which could trigger losses and hit small-to-medium-sized banks hard. With higher interest rates and tightening loan standards, investors will have to navigate the evolving CRE debt landscape. For those with access to capital, this may provide an opportunity to acquire assets as borrowers grapple with refinancing risk and cash flow constraints.
AI Used In Property Valuations
Pioneered by Zillow in 2006, AI-driven valuation models known as Automated Valuation Models (AVMs) are revolutionizing both residential and commercial real estate valuations. AVMs complement traditional appraisals by providing rapid property valuations. Evolving “Computer vision technology” allows AI to analyze pictures to help assess the condition of a building. Nobody is expecting AVMs to takeover property valuation but look to AVM software to augment property appraisals.
Existing Home Sales Up
While year-over-year home sales are still down 3.3%, existing home sales jumped a whopping 9.5% in February for a seasonally adjusted rate of 4.38 million, according to the National Association of Realtors. Total housing inventory at the end of February sat at 1.07 million units, a 5.9% increase from January and a 10.3% increase from the prior year. First-time homebuyers accounted for 26% of sales, down from 28% in January and 27% the previous year.
Investor Plan on Buying Multifamily
According to CBRE’s 2024 Global Multifamily Investor Intentions Survey in late 2023, 42% of 1,200 global real estate investors surveyed signaled they would be primarily investing in multifamily assets in 2024 with the intent to increase their purchasing. This was an increase from 30% of respondents the prior year and the first time in the survey’s 8-year history that multifamily was the most preferred investment across all three global regions: The Americas, Europe, and APAC.
REITS Continue To Invest In Healthcare
As 73 million baby boomers turn 65 over the next 6 years, senior living investments have become attractive alternative investments. CoStar reported that REITs acquired nearly $2 billion of assets in the healthcare sector. REITs make up 20% of the healthcare sector. By the end of Q4 2023, the healthcare sector saw a 7.6% increase in NOI over the previous year. . This isn’t a new trend, but a continuation of an existing one, so expect more in the coming months.
STOCKS
Stock Tips
TipRanks, a well-regarded platform for evaluating analyst performance, identified three stocks to hold long-term, i.e., cybersecurity firm CrowdStrike (CRWD), athletic footwear and apparel company Nike (NKE), and the Jordan brand, which is on the path to emerge as the second-largest brand in North America.
Intel Scores Big With $8.5 Billion Grant From Chips Act
The White House announced it is earmarking up to $8.5 billion in grant funding from the CHIPS Act to support Intel. This marks a significant step toward revitalizing semiconductor manufacturing in the United States. While Intel has encountered recent revenue and market capitalization challenges compared to Nvidia, AMD and Qualcomm, it remains a cornerstone of the U.S. semiconductor landscape.
Chipotle Anticipates Improved Trading Liquidity From Stock Split
Chipotle Mexican Grill Inc. recently announced a 50-to-1 stock split slated to go into effect in June 2024. Chipotle’s shares jumped 8% on the news of the split. While the move doesn’t change Chipotle’s economic value, it is seen as a positive move to improve trading liquidity and to broaden the investor base.
Investors Explore Opportunities Beyond Nvidia
After Nvidia’s recent announcement about its Blackwell graphics processing units, investors are now looking beyond the company itself to explore opportunities in related sectors of the data center industry. Analysts anticipate further growth in Nvidia’s profits within the rapidly expanding artificial intelligence (AI) sector. Companies like Coherent, Lumentum, and Applied Optoelectronics could see an uptick in price due to Nvidia’s announcement.
Apple Remains Strong Amid DOJ Antitrust Lawsuit
Financial analysts are closely monitoring the Department of Justice’s antitrust lawsuit against Apple. Despite the news, analysts still believe Apple (APPL) will have strong gains ahead, especially with its Edge AI initiatives.