Below, David Jangro, Axia Director of Investment, shares some noteworthy CRE news stories and provides insights on these topics. You can review the high-level takeaways or full commentary below.
The massive demographic shifts witnessed throughout the coronavirus pandemic and thereafter have been well documented, both by mainstream news sources and in many of our webinars and commentary here at Axia. From data compiled by Bloomberg, it is evident these demographic shifts have unsurprisingly correlated to increases in many southern and western states’ share of the US’s total GDP. This makes intuitive sense as with more people come more jobs, spending, and growth. While there are some forecasts calling for a slight rebound in in-migration back to larger coastal or gateway cities over the next 5-10 years, we feel the growth experienced by the Sunbelt and many markets in the Intermountain West has momentum and stickiness that will lead to these areas maintaining solid fundamentals for years to come.
High Level Take-Away: States in the South and West have been the primary beneficiaries of demographic shifts brought on by the pandemic. These demographic shifts are now showing up in increased state level GDP and suggest the markets which have experienced high levels of growth will continue to attract employers and employees alike.
At the Federal Reserve’s July FOMC meeting the decision was made to hike the Fed funds rate by another 25bp to a range of 5.25%-5.50%. While this move was not entirely unexpected, as it was fully priced in by the market prior to the decision and the Fed’s preferred economic KPI’s continue to justify their hiking maneuvers, there is some nuance to unpack. Recently, inflation seems to have peaked and is now retreating towards the Fed’s 2% target, but remains elevated with core inflation sitting at 4.8%. Unsurprisingly, in the wake of double digit rent growth across multifamily properties brought on by pandemic-fueled demographic shifts, and now driven by elevated home prices and 7% mortgage rates, rent and mortgage payments account for over 70% of the increase in inflation tracked by the Fed. The rub here is that the Fed’s preferred measures of rent operate on a significant lag, opening the door for rate hiking action to overshoot much too far into restrictive territory. If a silver lining is to be found among the Fedspeak following their July meeting, it is in the fact Jerome Powell’s language now hints at the Fed being at or near their terminal rate. This is critical to the commercial real estate industry as the tightening of credit has largely been a reaction function among lenders to uncertainty around interest rates. There are other factors at play and this is largely oversimplifying a complex issue, but lenders should begin softening terms and credit availability once they have a reasonable level of confidence they won’t be originating “out of the money” loans. Furthermore, many will point to large bid-ask spreads driving the slowdown in CRE transaction activity, however, I am of the belief this is primarily a function of credit availability and that the bid-ask spread should narrow once looser credit greases the tracks for deals to close.
High Level Take-Away: The Federal Reserve’s 25bp hike at their July meeting was accompanied by language from Jerome Powell suggesting the Fed is at or near their desired terminal rate. While no interest rate cuts are expected until late 2024, stability and a lack of further hiking should hopefully ease lenders back into the capital markets and help commercial real estate transaction activity pick up.
Portfolio Manager - Director of Investment
Before joining Axia, David developed real estate experience at Everbank/ TIAA CREF in the distressed MBS trading unit and on one of Colliers market-leading investment brokerage teams. David brings a decade of financial services experience, working at Credit Suisse and Goldman Sachs within their Wealth Management and Hedge Fund Strategies groups, and an MBA from Vanderbilt.