Fed Raises Rates Toward Normalization; Rising Confidence in Expansion is Key

 

 

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Research Brief
March 2017
FEDERAL RESERVE
Developing Trends
At least two more rate increases were signaled by the Fed for the remainder of 2017. Strong confidence combined with rising fiscal stimulus and tax cuts, however, could spark faster economic expansion and cause the Fed to become more aggressive with rate hikes in an effort to maintain balanced growth.
The Federal Reserve must focus on the delicate balance of maintaining growth without allowing inflation to rise too fast. However, rising inflation does signal stronger economic growth and boosts the appeal of commercial real estate due to its inflation-hedge characteristics.
Though yield spreads will likely compress as the cost of capital rises, cap rates have not historically moved in tandem with Treasury rates. Declining vacancy combined with rent growth will underpin continued performance gains, sustaining a positive long-term investment outlook. Combined with market liquidity and strong capital flows to commercial real estate, valuations remain supported.
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Fed Rate Increase Offers Mixed Results
KEY OBSERVATIONS:
Fed action signals their confidence in the economy and staves off future inflation risk.
Rising interest rates are reinforcing investor caution and slowing investment real estate transaction activity.
As clarity on tax reform, regulatory reform and fiscal policy emerges, confidence should return, lifting sales activity.
A positive economic outlook motivated the Federal Reserve to raise its benchmark rate by 25 basis points. The Fed’s confidence has improved significantly over the past 12 months given the tightened labor market and steady retail sales growth. Rising Fed Funds do not necessarily align with Treasury rate movement, thus the Fed’s action will not cause a dramatic change in the 10-year rate. The jump in long-term interest rates at the end of 2016 caused buyers to recalibrate their assumptions, widening the bid/ask spread and slowing commercial real estate transactions. Investors have begun to factor the rising interest rate environment into underwriting but uncertainty regarding fiscal and tax policies will continue to restrain sales until greater clarity emerges.
235,000 Monthly Job Gain February 2017 2.8% Wage Growth Through February 2017 Y-O-Y
* Forecast Sources: Marcus & Millichap Research
Services; BLS; Federal Reserve Board
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Retail Sales Boosted by Three Significant Trends; Some Retail Components Falling Behind

 

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Research Brief
March 2017
RETAIL SALES
Developing Trends
Utilizing omnichannel approaches, both Ulta Beauty and Dick’s Sporting Goods recently announced strong sales growth and expansions. Ulta Beauty is planning 100 new locations over the coming year, highlighting strong demand at health and personal care outlets. Category sales rose 6.1 percent over the past year. Meanwhile, Dick’s Sporting Goods announced plans for 43 new stores this year, along with nine Golf Galaxy and eight Field & Stream locations. Sales in the sporting goods category rose 4.6 percent during the last year.
Grocery chains, anchors in local neighborhood centers, are aiming to open more than 280 locations this year, indicating vigorous grocery demand in local communities. As a result, retail vacancy has fallen to the lowest level in 16 years, ending 2016 at 5.5 percent. Vacancy is forecast to fall an additional 40 basis points this year. Midwestern grocer Meijer is also experimenting with an omnichannel approach, offering home delivery in six states to bolster sales amid competition from e-commerce.
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Retail Sales Boosted by Three Significant Trends;
Some Retail Components Falling Behind
Retail sales remained elevated in February, with core retail sales vaulting 4.4 percent over the past year, driven by three significant trends. Consistent job growth has added 2.4 million workers over the past year, wage growth is averaging 2.3 percent annually and consumer confidence remains near decade highs, fostering a strong retail consumption environment that will support retail center performance. Sturdy retail gains outshined weakness in the department and electronic store segments, where sales fell 5.6 percent and 6.0 percent over the past year, respectively. Weakness among mall-based department stores led to store closures from Sears, Macy’s and J.C. Penney, along with the bankruptcy of Hhgregg. These headlines obscure positive performance in local community retail establishments.
4.4% Core Retail Sales
Y-O-Y*
2.8% Inflation/CPI
Y-O-Y*
* Through January Sources: Marcus & Millichap Research Services; U.S. Census Bureau; National Retail Federation; University of Michigan Consumer Confidence Index
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Payroll Growth Drives Property Performance; Some Uncertainty as Investors Await Tax Plan

 

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Research Brief
March 2017
EMPLOYMENT
Developing Trends
Last month, employers created 235,000 jobs. Goods-producing sectors made a notable contribution to the total, adding 95,000 positions. Construction firms added workers, but natural resources and mining establishments also expanded payrolls for the fourth consecutive month as activity in the energy sector increased.
Retailers shed 26,000 workers from payrolls in February, reflecting some store closures and an ongoing shift of resources to online distribution. Retail property owners have opportunities to replace underperforming chains with fresh concepts, a factor behind a projected decline in U.S. retail vacancy this year to 5.1 percent.
Additional workers entered the labor force last month and secured jobs, leading to a drop in the unemployment rate to 4.7 percent. The unemployment rate for workers ages 20 to 34 also dipped to 5.8 percent, a positive for the potential release of pent-up household creation and apartment property performance.
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Payroll Growth Drives Property Performance;
Some Uncertainty as Investors Await Tax Plan
Healthy job creation in February illustrates a labor market riding considerable momentum. Job growth is bolstering commercial property performance improvements at a time when some uncertainty hangs over commercial property sales. Commercial real estate’s role as an inflation hedge will invigorate the transaction market as clarity on tax and economic policy emerges. A reduction in the unemployment rate last month supported a gain in the average hourly wage. Including the February increase, the average hourly wage is up 2.8 percent year over year, narrowly outpacing the rate of inflation. Growing wages will prompt the Federal Reserve to raise its lending benchmark next week, an expectation already priced into a rise in the yield on the 10-year U.S. Treasury.
235,000 Monthly Job Gain February 2017 2.8% Wage Growth Through February 2017 Y-O-Y
* Through February
Sources: Marcus & Millichap Research Services; BLS
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Homeownership Rate Falls to 12-Year Low; Young Households Favor Apartments

 

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Research Brief
March 2017
HOUSING
Developing Trends
Homebuilders recognize the need for starter homes. The size of a newly constructed single-family home fell 1.6 percent to 2,426 square feet last year. Increased starter-home deliveries would bring relief to the market, but high development costs prevent projects from moving forward.
Single-family permitting issuance dipped slightly from December but remains up 11.1 percent from January 2016. Single-family home starts also advanced 6.2 percent year over year. Rising building activity is good for multiple sectors of the economy as hiring in finance and construction increases while spending at building supply, home improvement and furniture stores also climbs.
Nearly 290,000 apartments were added to inventory during 2016 and strong absorption pushed vacancy down 20 basis points to 3.9 percent. Supply additions will peak this year. Multifamily permitting issuance and starts, however, are slowing, as development lending tightens, suggesting building will taper in 2018.
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Homeownership Rate Falls to 12-Year Low;
Young Households Favor Apartments
Low inventory is restraining sales of existing single-family homes, which rose in January by just 3.7 percent from last year. Despite an uptick in listings, the supply of available homes for sale held firm at a record-low 3.6 months. Healthy demand for homes lifted the median price 7.3 percent year over year to $230,400. Increased inventory could help alleviate some pressure, boosting sales activity and moderating home price appreciation. The homeownership rate fell for a 12th consecutive year in 2016, resting at 63.7 percent in December and declining 550 basis points from its peak. Among those under age 35, the prime renter cohort, the rate fell to 34.5 percent, down from a high of 43.1 percent in 2004. Young households’ increased propensity to rent fuels apartment demand, and the absorption of 294,100 units in 2016 was the fourth highest year on record.
$230,400 Median price of existing single-family home in January 2017 3.6 Months of supply at current sales pace in January 2017
Sources: Marcus & Millichap Research Services; U.S. Census Bureau; MPF Research; National Association of Realtors; National Association of Home Builders
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250