Booming Economy Prompting Hawkish Fed Policy; Global Financial Markets May Complicate Future Action

 

 

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Research Brief
June 2018
FEDERAL RESERVE
Developing Trends
Recession indicator close to tipping point. Following the increase in the Fed funds rate, the spread between the two-year Treasury and 10-year Treasury has fallen to 34 basis points, the lowest level since prior to the Great Recession.
Small business optimism on pricing, earnings signals percolating inflation pressure. A recent survey of small business owners by the NFIB showcased wide-spread optimism among small businesses, with compensation and expan-sion optimism at the highest levels in the history of the survey. Price hikes and plans to raise prices are at the highest point since 2008.
PPI and CPI gaining steam, reinforcing robust economy. The Producer Price Index reached a new cycle high of 3.1 percent, while the Consumer Price Index hit 2.8 percent, the highest level in 78 months, reinforcing a pickup in inflationary pressure. Inflation measures are now above the Fed’s target, reinforcing their hawkish policy stance.
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Booming Economy Prompting Hawkish Fed Policy;
Global Financial Markets May Complicate Future Action
Fed raises benchmark interest rate; additional increases anticipated. The Federal Reserve increased the federal funds rate by 25 basis points, lifting the overnight lending rate to a range of 1.75 percent to 2 percent. Citing stronger consumer spending, and a highly optimistic business community, the Fed laid out the potential for two additional rate hikes in 2018. The Fed noted strong job growth, accommodative fiscal policy and above-target inflation as reasons for continuing to normalize monetary policy over the coming months.

Federal Reserve faces balancing act as yield curve flattens. While the Fed suggested two additional rate hikes before year’s end, stimulative global monetary policies could restrain long-term Treasury yields. Very low long-term interest rates, particularly in Western Europe and Japan, could drive more international capital into U.S. Treasuries, restraining the 10-year yield to the 3 percent range.

This would restrict the Fed’s ability to push short-term rates higher without causing the two-year yield to rise above the 10-year yield, a commonly known signal of an impending recession. The Fed will remain highly cautious about sending such a signal, and could curtail rate increases if long-term rates do not rise.

Lending costs increase in rising interest rate climate.
As the Fed has lifted interest rates, benchmark loan rates have followed. While some lenders are absorbing a portion of the increase, borrowers will increasingly face higher interest rates, which may motivate buyers to seek price reductions. However, economic growth continues to lift NOIs, prompting sellers to remain committed to higher asking prices, creating an expectation gap. Net-leased properties face the greatest rebalancing risk due to their bondlike lower yields, but they have yet to undergo wholesale repricing.
1.90% Fed Funds Rate* 2.92% 10-Year
Treasury Rate*
* As of June 18
Sources: Marcus & Millichap Research Services; BLS; Federal Reserve Economic Data
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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.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Competition for Staff Invigorates Office Space Demand; Labor Shortage Could Emerge in Second Half of Year

 

 

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Research Brief
June 2018
EMPLOYMENT
Developing Trends
With 223,000 jobs added last month, May became the 92nd straight month of employment additions and the unemployment rate dropped to 3.8 percent. The unemployment rate hasn’t been this low since April of 2000.
Employment growth supports apartment demand. The expanding job market will drive increasing household formations with high propensities to rent and boost absorption during the key spring leasing season. The tight national vacancy rate in the first quarter, of 5 percent, produced overall rent growth at 4.5 percent.
Federal Reserve’s difficult balancing act. The strength of the labor market supports the Fed maintaining a hawkish stance, yet it will be cautious not to push short-term rates above the 10-year treasury, for fear of signaling a pending recession.
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Competition for Staff Invigorates Office Space Demand; Labor Shortage Could Emerge in Second Half of Year
Labor market enters a new paradigm. For the first time on record, the number of job openings exceeds the number of people out of work and seeking employment. At the end of April, job openings stood at 6.7 million while the number of unemployed sat at 6.3 million. But despite this abnormal condition, employers and the economy have found ways to keep employment expanding at a quickened stride.

Office-using employment driving down vacancy. Over the past 12 months, the professional and business services sector has been expanding at a faster pace than overall employment, driving up office demand. The sector added almost 500,000 jobs and grew at 2.5 percent compared to the national rate of 1.6 percent. The increased hiring drove down the national office vacancy to 13.8 percent in the first quarter of this year. New construction

has also been highly concentrated. The top 10 markets for 2018 deliveries account for 56 percent of the square footage being completed. Furthermore, new supply additions continue to run below the levels witnessed during the 2000’s, which has helped maintain a declining vacancy rate with demand rising.

Class B and C office buildings outperforming. Since 2012, Class B and C office rents have seen higher growth rates than Class A properties nationally, a trend that continued in 1Q, as Class B and C buildings expanded rents by 2.2 percent compared to 1.7 percent for Class A assets. With demand for Class B and C properties significantly higher than the limited new supply to those classes, vacancy rates show Class A buildings at 16.3 percent and Class B and C properties sitting at 12.3 percent.

223,000 Job Gain
May 2018
3.8% Unemployment Rate in May 2018
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.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Millennials Driving Force Behind Home Sales; Affordable Suburban Locations Gaining Popularity

 

 

Research Brief
June 2018
HOUSING
Developing Trends
While listings under $200,000 continue to fall, overall total properties available for sale in April increased for a fourth consecutive month. With sales activity holding relatively in line with levels over the past two years, the months supply of inventory loosened to 4 months.
The median single-family home price rose 5.5 percent over the past 12 months to $259,900. Sales of homes above $250,000 continue to rise, following a trend of higher-priced home sales in the new-home market. The median price of a new residence was $312,700 in April.
The majority of U.S. households are already located in the suburbs and that number is set to rise as young adults living in downtown areas form families and choose larger housing options in more affordable areas. Many companies targeting millennial workers moved to the urban core to tap into this workforce that was also choosing to enjoy a live-work-play lifestyle. However, as this generation’s housing needs shift and companies are faced with soaring rents and few options for expansion in downtown locations, many office tenants will follow.
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Millennials Driving Force Behind Home Sales;
Affordable Suburban Locations Gaining Popularity
For a fifth consecutive year, millennials led home purchase activity, comprising 36 percent of the buyers in 2017. The oldest millennials are now 37, and as this generation ages and starts families, a wave of potential new buyers are moving into the market. Approximately two-thirds of first-time buyers in 2017 were millennials, but housing affordability remains a concern in 2018 as home listings under $200,000 continue to shrink. Homes in this price tranche have fallen 59* percent since May 2012.

As home prices in urban areas have appreciated faster than those in the suburbs, millennial buyers active in the market are reversing a trend of moving to the core. For a third straight year, more than 50 percent of homes sold to this generation during 2017 were in the suburbs as they seek out affordable housing options. Over the next five years, the young adult population in downtown cores is expected

to fall by an average of 0.7 percent each year, compared with annual growth near 1.5 percent since 2000.

While millennials are a driving force behind home purchases, first-time buyer activity constituted just 33 percent of sales in April, well below the long-term average of 40 percent. Homeownership among young adults is also the lowest of all age segments, with slightly more than 35 percent of those under age 35 owning a home, down from approximately 43 percent before the recession. The limited supply of entry-level housing, both new and existing, and the rising cost of debt will restrain millennial home purchases. Younger millennials are also just entering the workforce, and delays in other major milestones, such as marriage and having children, will contribute to a large share of these individuals choosing to rent over the next few years.

$259,900 Median price of existing single-family homes in April 2018 4.0 Months of supply at current sales pace in April 2018

 May 2012 ** Through May 2018 * compiled from the realtor.com residential listings database at http://www.realtor.com/research/data Sources: Marcus & Millichap Research Services; U.S. Census Bureau; Real Page, Inc.; National Association of Realtors; National Association of Home Builders; New York Fed Consumer Credit Panel/Equifax

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.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Heightened Consumer Confidence Remains Driver Behind Strong Spending, Improving Outlook for Retail

 

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Research Brief
May 2018
RETAIL
Developing Trends
Job market easing modestly. The U.S. economy added 164,000 jobs in April, dropping the national unemployment rate to 3.9 percent, the lowest measure since December 2000. Job openings, however, reached a record 6.6 million positions, signaling that there may be a shortage of qualified workers.
Large companies beginning to invest more in their workers. The sizable corporate tax cuts could become more evident in the near future, as companies like CVS, Starbucks and Target have committed to raising wages. A tightening labor market should provide a boost to wages, as well.
Consumers optimistic about U.S. economy. With the national economy exhibiting considerable strength, consumer confidence has risen 7.8 percent year over year. Key economic indicators point to a continuation of this upward trend.
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Heightened Consumer Confidence Remains Driver Behind Strong Spending, Improving Outlook for Retail
Stout retail sales growth a product of strong economic metrics. The confluence of several factors contributed to another month of steady spending. Core retail sales increased 4 percent year over year in April, the third straight month of at least 4 percent annual growth. Near record-high levels of consumer confidence have aided retail sales in past months, as many consumers now have more discretionary income, largely due to tax cuts and solid wage growth. Wage gains have remained range-bound in the mid-2 percent area for the past few years, but this number is expected to rise as large companies portend wage hikes. Additionally, the unemployment rate slid below 4 percent in April thanks to another month of job creation. With a number of tailwinds propelling retail, the sector is poised for continued growth this year. Investors seek stability when exploring retail investment options. With investor sentiment moving back to an upward trend, retail investments have become a more engaging option for those looking to deploy capital into commercial real estate. Positive spending trends in grocery stores have generated increased investor demand for centers anchored by these assets. High foot traffic and the adoption of omnichannel retail practices make them particularly attractive. Food and beverage sales have also generated a strong performance in recent months. Bolstered spending in this category has enticed some investors to examine quick-service and fast-casual restaurant investment opportunities more closely. These assets have proved to be relatively stable through a range of economic conditions, providing investors with the confidence of the assets’ durability.
4.0% Core Retail Sales
Y-O-Y*
7.8 % Consumer Confidence Index
Y-O-Y*
* Through April
Trailing 12-month average
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; BEA; BLS; U.S. Census Bureau
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.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250