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Industrial Real Estate: What a Difference a Year Makes

Plus, Powell Says March Cut Is Unlikely and 5 more Real Estate Insights

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Macro Trends

GDP Up 3.3% in the Fourth Quarter '23 link

  • America's real GDP saw a significant increase of 3.3% in the fourth quarter of 2023. This growth, however, marks a decrease from the previous quarter's annualized increase.

Economic Watch: Fed Holds Rates Steady, Signals Caution on Rate Cuts link

  • The Federal Reserve maintains the federal funds rate at 5.25% to 5.5% and continues reducing its balance sheet by $95 billion monthly.

  • Despite removing language about further tightening, the Fed requires more confidence in inflation moving sustainably towards 2% before considering rate cuts.

  • Rising real interest rates present a challenge, but the U.S. economy is expected to stay resilient, with a growth forecast of 1.6% for the year.

  • Real estate investment activity is anticipated to increase in the latter half of the year as the Fed begins to cut rates.

  • Leasing activity is expected to stay relatively resilient, though tempered by economic and business uncertainties.

Powell Says March Cut Is Unlikely link

  • The Federal Reserve's decision to keep the benchmark federal funds rate steady was expected, but Jerome Powell's explicit dismissal of a March rate cut was a surprise. This decision reflects the Fed's cautious approach despite core inflation rates being below the 2% target.

  • The Fed's stance indicates a focus on achieving a 'soft landing' for the economy, balancing between controlling inflation and supporting growth. The current economic conditions are seen as positive, but the Fed remains vigilant, suggesting a careful and measured approach to future rate adjustments.

Real Estate Trends

Home Equity Down Slightly Across U.S. During Fourth Quarter But Remains Strong link

  • In Q4 2023, 46.1% of U.S. mortgaged homes were equity-rich, a decrease from 47.4% in Q3 2023 and 48% in Q4 2022.

  • The percentage of seriously underwater mortgages in the U.S. rose marginally from 2.5% to 2.6% in the last months of 2023.

  • The median home price growth in 2023 was just 2%, the weakest since 2012, influenced by mixed factors like rising mortgage rates and tight home supply.

  • Equity-rich mortgages declined in 41 out of 50 U.S. states, with significant drops in the Midwest and West regions.

  • The highest levels of equity-rich homeowners were in the Northeast and West, with Vermont leading at 82.8%.

Industrial Real Estate: What a Difference a Year Makes link

  • Industrial availability rates have significantly shifted in the past year. A year ago, they were below the long-term trend in almost all U.S. markets, with Denver as the only exception. Now, the situation has completely reversed, indicating a dynamic shift in the industrial real estate sector.

  • The decline in occupier demand, especially in interest-rate sensitive sectors like for-sale housing, has impacted availability rates. For example, in Riverside, CA, the rate soared from 2.3% to 7.3% between Q3 2022 and Q3 2023. This change reflects broader market adjustments, including price resistance and shifts to more economically viable locations like Phoenix.

  • A construction boom, initially fueled by pandemic-era demand and pre-interest rate hike financing, led to increased availability. However, this boom has subsided as credit conditions tightened in 2023. If the economy remains resilient and space absorption meets expectations, availability rates might gradually return to equilibrium, suggesting a potential stabilization in the future.

Risks

Japanese bank tanks over 20% after flagging losses tied to U.S. commercial property link

  • Aozora Bank's shares plummeted to their lowest in eight months, dropping by 21.5% to 2,557 yen. This drastic fall was triggered by the bank's warning of a net loss of 28 billion yen for the fiscal year, a stark contrast to its previously forecasted net profit of 24 billion yen.

  • The bank's financial woes are attributed to its exposure to U.S. office loans, compounded by higher U.S. interest rates and the shift to remote work due to COVID-19. These factors have created a challenging environment for the U.S. office market, characterized by low liquidity and adverse conditions.

  • Aozora Bank's situation reflects broader concerns in the banking sector, as evidenced by New York Community Bancorp's recent surprise net loss of $252 million. This loss, partly due to addressing weaknesses in the office sector, highlights the ongoing challenges faced by U.S. regional banks in the current economic climate.

Something I found Interesting

Walmart Plans To Open or Expand More Than 150 Stores Over Next Five Years link

  • Walmart is entering a new phase of growth, planning to open or expand over 150 stores in the U.S. within five years. This marks a significant shift from their previous halt in domestic brick-and-mortar openings.

  • The company will remodel 650 stores across 47 states and Puerto Rico in the next 12 months, creating thousands of jobs. This initiative includes developing a nationwide network of affordable electric vehicle charging stations.

  • Walmart's new and remodeled stores will feature the "Store of the Future" concept, with improved layouts, expanded selections, and advanced technology. Over $9 billion has been invested in the past two years to upgrade over 1,400 stores, focusing on energy efficiency and sustainability.

Pro Member Only Content

Here Are the Five Top Markets for CRE Transactions 

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  • In 2023, all 25 of the most active U.S. markets experienced significant declines in real estate transaction volume, with individual asset sales dominating the market. Dallas remained the top destination for commercial real estate (CRE) investment, leading in multifamily sales, despite a 58% drop in volume from 2022.

  • Los Angeles and Manhattan followed Dallas in transaction volume, with Los Angeles seeing a 47% decrease and Manhattan making a comeback from 6th to 3rd place, despite a 45% drop. Both cities saw their largest markets in industrial and multifamily (Los Angeles) and office (Manhattan).

  • Chicago and Atlanta rounded out the top five, with Chicago moving up from 7th to 4th place and Atlanta falling from 3rd to 5th. Both cities experienced over 40% declines in transaction volume, with multifamily and industrial sectors leading in Chicago and multifamily in Atlanta.

  • link

Harvard’s America’s Rental Housing Report for 2024 - Key Points 

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  • Rental Markets Cool After Overheating During the Pandemic

  • Unaffordability Reaches New Heights

  • US Continues to Lose Low-Rent Units and Rents Significantly Outpace Incomes

  • Record Number of People Are Experiencing Homelessness

  • Rental Stock Is Aging, and Needs Investments in Energy Efficiency and Climate Risk Mitigation

  • Need for Rental Assistance Is Greater Than Ever

  • link

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Cheers,

Vidit

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