X-Caliber June 2024 Market Movers
Capital Market Matters: Uncertainty Wants Safety
The May jobs report was good and bad — 272,000 new jobs, good; unemployment topping 4.0% for the first time since January 2022, mildly bad. Unemployment was never below 4% from February 1970 to April 2018, so the current number is moderate. However, it’s a move in a potentially disturbing direction.
Since last fall, the Federal Reserve Bank of San Francisco has said consumer savings from pandemic rescue funds were largely spent. Consumer debt continues at historical highs. Personal spending has remained high, between 65% and 69% of GDP since 2000. But for how long?
Personal consumption expenditures and disposable personal income in real terms were down 0.1% between March and April. The Wall Street Journal wrote that “the cumulative impact of years of inflation is finally catching up with consumers,” causing them to cut discretionary spending as major brands “from Starbucks to Kohl’s are saying in their public reports.”
Some analysts say CRE loan default rates are improving. But investors are worried about federal debt and the need for more borrowing, driving 10-year Treasury yields up after a drop, with no promise where they’ll be next week.
Are things good or bad? There’s no way to tell. A soft landing might still be possible. Perhaps the Fed will keep interest rates high into 2025 — or drop them in an economic slump. That is affecting investment decisions all over, including commercial real estate.
“Today in CRE capital markets, investors are cautiously optimistic in the middle of a mixed economic backdrop,” says X-Caliber President and Chief Executive Officer Chris Callahan. Core properties in prime locations with stable cash flows offer safe havens. Alternative financing options such as debt funds and private equity provide flexible financing solutions. “Despite challenges, the market’s resilience is evident, with steady demand for industrial and multifamily sectors driven by e-commerce growth and housing shortages.”
CRE Insights: Zero Emissions Definition
Concerns about carbon emissions have become a staple of commercial real estate. Increased attention from regulators, investors, and tenants pushes owners to understand the carbon load of their properties and move it closer to zero. But what does that mean and when do you reach it?
That is why the White House’s announcement of a National Definition of a Zero Emissions Building is important. The Department of Energy earlier in 2024 created a blueprint to reduce building emissions 65% by 2035 and 90% by 2050, but the goal is nebulous without measurable criteria. The new definition says that a zero-emissions building must be “energy efficient, free of onsite emissions from energy use, and powered solely from clean energy.”
This isn’t a regulatory standard, but rather “guidance that public and private entities may adopt to determine whether a building has zero emissions from operational energy use, including emissions from tenants.” The draft definition includes specific language like having whole energy use at least 10% lower than the energy use according to the latest Illuminating Engineering Society of North America (IECC) or the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) 90.1 model code. These standards are already in use for tax incentives under the Inflation Reduction Act.
On the Horizon: Industrial Turbulence Ahead
Two major developments could have an impact on industrial markets. One is a “deluge” of new construction being completed this year and next in some important industrial markets, according to CBRE Econometric Advisors, with Phoenix, Riverside, Atlanta, Dallas, and Houston seeing the biggest impact. Phoenix is by far the largest example with 33 million square feet of new industrial space under construction. Two-thirds are expected to be completed in 2024, with the last third coming next year. In some markets, the additions represent about 12% of existing inventory. Landlords will “need to be aggressive in leasing,” the firm said, to avoid being priced out of competition. In a report, CoStar noted that big box industrial space near major U.S. ports has hit a record high.
The other development is a shift in international trade. Since last year, Mexico has replaced China as the largest trade partner of the U.S., a result of tensions between the latter and the U.S. and lessons possibly learned during the pandemic about diversification in supply chains. Canada, while remaining the third largest partner, has been closing the gap with China. Goods from the northern and southern neighbors are likely to arrive by truck or train, not ship. That will change supply chain designs and, as a result, the geographic balance of where industrial facilities are needed.
