Special Research Brief: Brexit Surprise Has Silver Lining

June 24, 2016

  • Contrary to polls and predictions, citizens of the United Kingdom voted to leave the European Union, creating uncertainty that induced a sharp decline in global equity markets. The British currency fell dramatically, boosting the value of the U.S. dollar, and the quick re-deployment of capital to safer assets pushed U.S. Treasury rates to their lowest levels since 2012. Despite the short-term volatility resulting from this unanticipated outcome of the British vote, the risk to the U.S. economy should be limited.
  • The U.K. receives only 3.9 percent of U.S. exports, so even a modest British recession resulting from the departure would minimally impact the U.S. economy. Granted, the broader EU takes in about 15 percent of U.S. exports, but the U.K. exit is unlikely to spark a substantive economic decline across the remaining 27 members of the union. Another potential hazard stems from the concentration of banking services in London with deep ties across the globe. However, central banks worldwide stepped in to backstop liquidity and reassure markets that banking systems will remain operational. In addition, U.S. banks recently passed their stress tests, providing assurances that they have sufficient liquidity to navigate choppier financial waters.
  • Following its meeting earlier this month, the Fed cited risks associated with the Brexit vote as a contributing factor in its decision not to raise rates at that time. With the outcome of the British vote decided, the potential for a July increase has been virtually erased, and the probability of a September hike has fallen significantly. In conjunction with the decline in Treasury rates and reassurances of liquidity, commercial real estate investors could benefit from low lending costs. Although lender spreads generally widened in the aftermath of the Brexit vote, interest rates remain highly favorable for investors.
  • The greatest downside risk remains that falling equity markets could create sufficient fear that investors begin a sell-off, similar to what happened at the beginning of the year. These contagion-related fear-induced risks could weaken business and consumer confidence, slowing the economy and creating downside potential for the economy.
  • The Brexit will likely have little impact on short-term commercial real estate performance as few demand drivers will be influenced. Apartment demand in the second quarter appears quite robust, with positive demographics and long-run hiring momentum supporting the sector. The outlook for office and retail properties is more mixed, depending on how consumers and businesses perceive the news. Should confidence falter, demand for these property types could soften modestly, but restrained construction will remain an important factor supporting the performance of these asset types. Industrial properties are positioned to benefit from the Brexit as the strengthening dollar could lift imports of foreign goods, though potential downsides exist for U.S. manufacturers that export.
  • While the Brexit decision has elevated short-term uncertainty that will likely translate into greater investor caution, it could also potentially boost commercial real estate sales in the mid to long term. Downward pressure on interest rates will benefit investors, while the appeal of hard assets with favorable yields could draw additional capital to the sector. The depth and duration of volatility surrounding the event will significantly influence the ramifications for investment real estate. However, barring an unanticipated major economic setback or consequences stemming from the Brexit, the prospects of significant downside risk are limited.

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.

Gains in Home Sales Posted During April As Low Interest Rates, Positive Economic Trends Align

June 14, 2016

  • The increase in sales of previously owned homes and new single-family residences in April illustrates growing demand for owner-occupied housing and the improving ability of prospective homebuyers to save for downpayments and handle monthly mortgage obligations. Interest rates on residential mortgages remain near historic lows, maintaining housing affordability and stimulating a higher volume of single-family home purchases even as prices continue to rise and for-sale inventory remains limited. Low interest rates and a slight moderation in mortgage lending criteria will continue to propel the single-family home market in the near term, and builders could be encouraged to introduce more starter homes to the construction cycle to capture rising demand.
  • The stability of the labor market and modest income growth continue to enable a transition into owner-occupied housing, supporHome-Prices-Risingting an increase in purchases. Sales of existing single-family residences excluding condominiums rose 6.2 percent over the past year to push up the median price to $235,400, a new high in the post-recession period. Inventory remains tight, however, signaling that some demand may remain unfulfilled and that prospective buyers will continue to confront rising prices and keen competition. The supply of single-family homes for sale compressed to 4.5 months in April. A six-month level of supply is regarded as equilibrium, and the market has been below that mark since June 2012.
  • Despite rising demand for single-family homes, developers continue to encounter obstacles to accelerating production. Annualized, construction started on 778,000 single-family residences last month, significantly less than the long-term average. Homebuilders are focusing heavily on trade-up homes at the exclusion of so-called starter homes, as evidenced by a rise in the median price to nearly $322,000 in April. Builder confidence remains high, however, and contractors could broaden the mix of offerings to include models with entry-level prices in the coming months to attract a larger share of homebuyers.
  • The homeownership rate has sunk from a high of 69.2 percent prior to the recession to 63.5 percent in the first quarter, the lowest point in over 20 years. Apartments have captured a considerable share of housing demand, and U.S. apartment vacancy nominally rose in the first quarter to 4.2 percent, or roughly 100 basis points below the long-term average. Approximately 285,000 units are on track for completion this year, the high point during the current cycle, and while pockets of overdevelopment will likely emerge in select submarkets of major metros, demand remains strong and the absorption of nearly 258,000 units will keep vacancy near historical lows.
  • The healthcare industry is evolving and medical providers are taking a more patient-centered approach, encouraging new development to follow rooftops. Ambulatory care centers, urgent care offices, outpatient services and physicians are locating near residential subdivisions to better serve the community. This year, an estimated 12.2 million square feet of medical office space will come online, and a large share is away from hospital campuses.

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.

Steady Economic Performance Slightly Lifts U.S. Payrolls; Soft Hiring Could Prompt Reconsideration of Fed Move

Declining unemployment claims and job openings near an all-time high point to an expanding labor market, not one that is losing momentum as suggested by weaker-than-anticipated job creation in May. The slight gain in payrolls, however, offers the Federal Reserve an opening to withhold a rate hike this month and delay action until it believes economic momentum supports a hike. The central bank will also have more time to digest the effects of a possible exit from the European Union by Britain, which will be determined by popular vote on June 23, due to the potential for volatility and uncertainty.
Employers added 38,000 jobs in May and downward revisions were made to the preceding two months. Goods-producing industries contracted during May, but sectors with strong ties to consumers bucked the broader trend of slower hiring. The healthcare sector continues to expand as more workers enroll in employer-sponsored plans and the population ages, supporting a gain of more than 55,000 healthcare positions last month. Bars and restaurants, meanwhile, accelerated hiring from 9,200 positions in April to more than 22,000 new jobs last month in response to growing consumer spending on services. Information employment, though, declined by 34,000 posts in May, primarily as a result of a strike by Verizon.  Monthly-Change-in-Employment-Large
Numerous measures of labor market slack remained tight last month. The underemployment rate was unchanged at 9.7 percent, marking the eighth consecutive month of a sub-10 percent reading. The rate peaked at 17.1 percent during the recession. Labor market stress also eased last month, with the number of long-term unemployed falling to the lowest level in eight years, a trend that will be considered in the Fed’s monetary policy deliberations.
The willingness of consumers to spend on discretionary items, including dining and entertainment outside of the house and travel, is supporting the strong performance of service-oriented commercial properties. Bars and restaurants remain highly sought tenants in shopping centers for their ability to attract customers and helped to maintain the U.S. retail property vacancy rate near 6 percent in the first quarter. Low gas prices also provided a lift to spring travel, resulting in higher U.S. hotel occupancy in April. Through the first four months of this year, U.S. occupancy rose nominally to 62.5 percent and supported modest growth in key revenue measures.
Payrolls in professional and technical services, a predominantly office-using employment sector, grew by nearly 26,000 workers in May, surpassing the total added in the preceding month. In addition, temporary staffing declined last month and has contracted year to date. Office employers’ willingness to commit to permanent workers will trigger a higher rate of tenant expansions in the coming months and contribute to net absorption of 86.5 million square feet in the U.S. office market this year. The increase in occupied space, combined with restrained construction, will reduce the nationwide office vacancy rate 30 basis points to 14.8 percent in 2016.

Steady Economic Performance Slightly Lifts U.S. Payrolls; Soft Hiring Could Prompt Reconsideration of Fed Move

  • Declining unemployment claims and job openings near an all-time high point to an expanding labor market, not one that is losing momentum as suggested by weaker-than-anticipated job creation in May. The slight gain in payrolls, however, offers the Federal Reserve an opening to withhold a rate hike this month and delay action until it believes economic momentum supports a hike. The central bank will also have more time to digest the effects of a possible exit from the European Union by Britain, which will be determined by popular vote on June 23, due to the potential for volatility and uncertainty.
  • Employers added 38,000 jobs in May and downward revisions were made to the preceding two months. Goods-producing industries contracted during May, but sectors with strong ties to consumers bucked the broader trend of slower hiring. The healthcare sector continues to expand as more workers enroll in employer-sponsored plans and the population ages, supporting a gain of more than 55,000 healthcare positions last month. Bars and restaurants, meanwhile, accelerated hiring from 9,200 positions in April to more than 22,000 new jobs last month in response to growing consumer spending on services. Information employment, though, declined by 34,000 posts in May, primarily as a result of a strike by Verizon.
  • Numerous measures of labor market slack remained tight last month. The underemployment rate was unchanged at 9.7 percent, marking the eighth consecutive month of a sub-10 percent reading. The rate peaked at 17.1 percent during the recession. Labor market stress also eased last month, with the number of long-term unemployed falling to the lowest level in eight years, a trend that will be considered in the Fed’s monetary policy deliberations.
  • The willingness of consumers to spend on discretionary items, including dining and entertainment outside of the house and travel, is supporting the strong performance of service-oriented commercial properties. Bars and restaurants remain highly sought tenants in shopping centers for their ability to attract customers and helped to maintain the U.S. retail property vacancy rate near 6 percent in the first quarter. Low gas prices also provided a lift to spring travel, resulting in higher U.S. hotel occupancy in April. Through the first four months of this year, U.S. occupancy rose nominally to 62.5 percent and supported modest growth in key revenue measures.
  • Payrolls in professional and technical services, a predominantly office-using employment sector, grew by nearly 26,000 workers in May, surpassing the total added in the preceding month. In addition, temporary staffing declined last month and has contracted year to date. Office employers’ willingness to commit to permanent workers will trigger a higher rate of tenant expansions in the coming months and contribute to net absorption of 86.5 million square feet in the U.S. office market this year. The increase in occupied space, combined with restrained construction, will reduce the nationwide office vacancy rate 30 basis points to 14.8 percent in 2016.
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