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As they say, if you don’t want the answer, don’t ask the question. But Congress did insist that Federal Reserve Chair Jerome Powell talk about the economy and the Fed’s take this morning. His testimony is probably not what most people want to hear, but certainly what businesspeople, especially in CRE, need to.

If, like an economic Dylan Thomas, you were concerned that the Fed’s policies might go gentle into that good night, don’t worry, they aren’t.

In the testimony, Powell quickly invoked the Fed’s dual mandate of promoting maximum employment and stable prices. Notice, there is no direct mention of easing business costs or supporting asset prices. Those are supposed to come as byproducts — boost business to indirectly promote employment and slow it to moderate prices.

“We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt,” Powell said, for those who want a pause to assess progress. “Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.”

 

Or, as Oxford Economics translated in an emailed note: “Fed Chair Jerome Powell used his semi-annual testimony to push back against financial markets as his comments were hawkish, noting that the terminal rate for the fed funds rate could be higher than previously anticipated. He noted that he isn’t hesitant to increase the pace of rate hikes if the data on employment and inflation continue to come in stronger than anticipated.”

Although inflation had seemed to be slowing, January was a jarring reminder that inexorable progress toward goals is unusual. Jobs, consumer spending, manufacturing numbers, and inflation “reversed the softening trends that we had seen in the data just a month ago.”

It was the “breadth of the reversal” that meant inflation was running hotter than during the last meeting of the Fed’s Federal Open Market Committee. And even then, the underlying message was not to expect immediate lower interest rates.

Inflation “remains well above the FOMC’s longer-run objective of 2 percent,” and Powell was talking not just the overall number, in which housing costs were a major driver. He specifically mentioned core personal consumption expenditures (PCE) inflation without the volatility of food and energy that push upwards, and core services without housing, which discounts that outlier.

“Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity,” said Powell. “Strong wage growth is good for workers but only if it is not eroded by inflation.”

 

Then he got to interest rates. “We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet.”

So, continuation of maybe 25-basis point increases and also continued scaling down of the balance sheet, which means reducing purchases of bonds that help fuel home mortgages and, so, that entire part of the construction and sales ecosystem.

However, the maybe is not to be ignored.

“While a quarter-point increase in the Federal Funds rate is still the most likely outcome of the Federal Reserve’s March meeting, expect the Fed to adopt a half-point increase in March if data on inflation and labor conditions continue to run hotter than expected,” said Marty Green, a principal with mortgage law firm, Polunsky Beitel Green, in an emailed note.

 

Source:  GlobeSt.

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In spite of rising interest rates and an uncertain economy, South Florida’s commercial real estate market is still an attractive place to invest in, finance experts say.

That was the general consensus among those who spoke at Tuesday’s Urban Land Institute’s Florida Summit at the JW Marriott Marquis Miami.

During a panel discussion on capital markets, panelists Acore Capital managing partner and co-CEO Warren de Haan; Morgan Stanley Real Estate Investing co-CEO Lauren Hochfelder; and senior managing director Jonathan Pollack said credit markets have tightened significantly as the Federal Reserve raised rates in an effort to control inflation. As a result, investors and lenders have become more particular with where they put their money.

However, South Florida and the rest of the Sunshine State are still appealing places for investors thanks to its rising population and openness toward business.

“Politicians in both the state and local level [in Florida] are playing to win,” Pollack said. “You want to be where there is growth and there is going to be growth in Florida.”

 

Hochfelder said South Florida has “officially arrived as a gateway primary market.” Within the area, there’s investor appetite for all real estate asset classes, including new Class A “trophy offices.”

Due to remote working trends in most of the U.S., office buildings elsewhere are seen as a risky endeavor. But in South Florida, the return-to-work trend is about 86%, compared to New York and San Francisco which is “half of that,” Hochfelder added,

De Haas, who recently moved from Los Angeles to Miami, said he was struck by the positivity of the people living in South Florida who desire to “do good” and “move the economy forward.”

“I think Miami showed everybody that they are … business-friendly, that the infrastructure is here, and they are open for business,” he said.

Since the pandemic, wealthy individuals, well-paid professionals, and businesses have been migrating to South Florida thanks to the lack of a state income tax, decent weather, and a pro-enterprise atmosphere, brokers and developers have told the Business Journal. This has resulted in rising rents for apartments, industrial, retail, and office.

CBRE’s Director of Research and Analysis Darin Mellott, who moderated the panel discussion, said the post-pandemic migration is part of a broader story across the Sun Belt, a region in the southern U.S. where taxes are generally low. However, he added, the growth that took place in South Florida outperformed other Sun Belt metropolitan areas.

“People coming to Florida are here for the long term,” Mellott said.”They are comfortable with this market.”

Yet, rougher times are coming for South Florida. As the years go by, so, too, will the adverse effects of climate change and sea level rise.

“While the issue is intermittent right now, it’s going to become a regular and bigger problem in the future,” he said.

In the more immediate timeframe, Mellott said the nation as a whole will likely face a mild recession next year with unemployment reaching as high as 5%.

“While we do think things will slow the next couple of quarters, we do see recovery at the end of next year,” Mellott said.

 

Source:  SFBJ

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Construction starts have remained robust this year but certain sectors could begin to see a slowdown in the coming months.

Total construction starts rose 4% in May to a seasonally adjusted annual rate of $979.5 billion, according to data released late last week by Hamilton, New Jersey-based Dodge Data and Analytics LLC. But among the major categories tracked by Dodge, nonresidential building starts was the only one that increased, by 20%, while residential starts fell by 4% and nonbuilding starts dropped 2% during the month.

It’s a signal homebuilders are starting to pull back on what had been an active construction pipeline through the Covid-19 pandemic, as demand for housing wanes amid a rising-interest-rate environment.

Year-to-date, total construction is 6% higher in the first five months of 2022 compared to the same period in 2021. In that period, residential starts have actually grown 3%, suggesting the tide is only starting to change on the homebuilding front.

Nonresidential building starts have increased 17% annually in the first five months of the year, while residential starts are 5% down.

Richard Branch, chief economist at Dodge Construction Network, said in a statement the construction sector has become increasingly bifurcated in the past several months.

“Nonresidential building construction is clearly trending higher with broad-based resilience across the commercial, institutional and manufacturing spaces,” he said. “However, growth in the residential market has been choked off by higher mortgage rates and rapidly falling demand for single-family housing. Nonbuilding starts, meanwhile, have yet to fully realize the dollars authorized by the infrastructure act.”

Branch said while the overall trend in construction starts is positive, the very aggressive stance taken by the Federal Reserve to combat inflation risks slowing momentum in construction.

Ken Simonson, chief economist at the Associated General Contractors of America, said in an interview he felt homebuilders are in much more precarious position right now than multifamily or nonresidential construction.

Ripple effects on construction starts from the passage of the federal $1.2 trillion Infrastructure Investment and Jobs Act late last year hasn’t been felt yet. Simonson said for a while he’s expected contractors wouldn’t go to work on any IIJA-funded projects until late 2022 or early 2023, which he said he continues to expect. When that occurs, that’ll bolster the pipeline for the nonbuilding sector.

Outside of single-family home construction, multifamily and warehouse development — both of which have seen big growth through the pandemic — may be the most vulnerable to a slowdown, Simonson said.

Seattle-based Amazon.com Inc.’s (NASDAQ: AMZN) disclosure this spring that it had excessive warehouse capacity is one signal of slackening demand, he continued.

“Now that there’s doubt about how strong consumer demand is going to be for goods, I think other businesses are going to slacken their buying and building of warehouse space,” Simonson said.

Amid rising costs and interest rates, it’ll become more challenging for multifamily developers to pencil out deals, also making it more vulnerable than other sectors, he added.

One of the sectors likely to boom: manufacturing. New automotive plants, and large-scale facilities to support the burgeoning electric-vehicle industry, will translate to new business for general contractors nationally, Simonson said.

 

Source:  SFBJ

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We have been in a Seller’s market for the last several years. Properties have been sold at values that have not been seen since before the great recession of 2007-2008.  The Federal Reserve has artificially kept the interest rates low and the President in 2020 and 2021 pumped billions of dollars into the economy.  Yes, this helped some people during the pandemic, but also prevented the normal cycle we have seen over the last 40+ years.

In South Florida, every 10 to 12 years, we have seen a down swing in property values, adjustments and corrections for a few years.  The downcycle was due to change around 2020, but, instead, the market heated up.  Why? Due to the movement of large corporations, senior level executives and large private investors moving to South Florida.  This was due in part to the pandemic and no personal income tax.  This kept home prices from declining and values dramatically increasing.  They also sold their investment properties in the high tax states such as NY, NJ, California, Pennsylvania, etc. and purchased replacement properties in Florida.

Why is the market starting to shift now?  Because the Fed is looking at multiple rate increases (4) this year of  75 basis points each meeting. We could see interest rates as high as 6% to 7%, before the end of the year.  This means that Capitalization (Cap) rates must also move up, which will cause the pricing to decline.  We have seen this already occurring in other states in recent weeks.  This will make Buyers happy and put Seller’s in a state of reverse sticker shock, and, in some cases, they may even pass on good sale prices because they do not believe prices are declining.  Buyers are already refusing to accept some of the low cap rates on non-credit tenant transactions.  Transactions will slow in the third and fourth quarter of this year except for seller’s that are now trying to complete their 1031 exchanges.  These only will happen on truly all cash sales with no debt as the current rates are in the 4.75% to 5.5% range from banks and you can’t buy a property with leverage at a 4% to 4.75% cap rate.  The returns are breakeven to negative.

So, I believe we are entering a stabilizing market, we will see adjustments in the next 12 to 18 months, but not a crash.  It won’t be a Sellers or a Buyers’ market, but a market at equilibrium.  This means that both sides will walk away giving a little to make a transaction happen.

If you are a seller there is still time to take advantage of this market, but you need to be realistic and move quickly. Properties need to be properly unwritten with management fees (5%), vacancy and collection rates (5%), reserves for replacements, adjustments for increased property taxes based on sale, and a reasonable cap rate.

SperryCGA can help you still take advantage of the market. We have 60 offices throughout the US, with 8 offices here in Florida.

 

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