How to understand the US economic recovery based on recent labor market data?
The US labor market has performed better than expected in recent weeks, but there is still a long way to go before the economy fully recovers. As of September 5, the number of weekly jobless claims reached 884,000, the second week in a row below the one million threshold. Meanwhile, the job market added 1.4 million jobs in August, and the unemployment rate fell to 8.4% from 10.2% in July. However, more than 29 million workers still receive some form of unemployment benefit, and this number has remained between 2700-32 million since the beginning of May. From a broader economic perspective, Moody's Analytics and the CNN Business Return to Normal Index (an economy that measures pre-pandemic levels) show that economic activity bottomed out of 59.2% in mid-April and is currently 78.8%, or 21% lower than before the pandemic. Although it looks like the worst economic downturn is over, significant downside risks will persist until the virus is brought under control.
Have inflation expectations changed in light of the reopening of the US economy in recent months?
Although the initial rebound of the US economic restart in August is weakening, US consumer price inflation in August continued to move in a healthy direction. After three consecutive months of decline from March to May, core CPI maintained month-on-month growth for the third consecutive month. Thus, given that economic activity has begun to rebound, a deflationary spiral appears less likely. Still, the most fascinating news about inflation relates to the Federal Reserve's decision to change its policy framework by adopting an average inflation target system. Although the move is mild and suggests that more stimulus measures may be introduced, it also suggests that the Federal Reserve will allow (or possibly) raise the inflation rate above its 2% target throughout the cycle. Furthermore, due to new changes in the Federal Reserve's policy framework, the first rate hike in this cycle will not occur until 2024 at the earliest, according to capital economic forecasts. As a result, the impact of a long-term low interest rate environment will reverberate in financial markets, including the commercial real estate sector, as investors seek returns.
What are the short-term return expectations for commercial real estate?
According to the American Pension Real Estate Association (PREA) consensus survey forecast for the third quarter, pension fund investors expect overall total earnings from the NCREIF Real Estate Index (NPI) to fall by 2.7% in 2020, which is 130 basis points higher than the second-quarter survey. . Respondents to the PREA survey remain optimistic that NPI will rebound in the next few years, that is, the overall return in 2021 will reach 2.5%, and the overall return in 2022 will reach 7.3%. As one would expect, retail properties are expected to be the worst affected by the pandemic, with the biggest decline. This year it was 11.4%, 2021 was 1.1%, then eventually rebounded to 5.8% in 2022. The office building industry is expected to fall into negative growth in 2020 with a total return of -2.6%. However, positive growth is expected over the next two years, 1.0% in 2021 and 7.0% in 2022. Apartment properties are expected to decline 0.9% in 2020, then rebound to 4.9% in 2021 and 7.9% the following year. The industrial sector remains the only major real estate type to record a positive total return this year, at 3.5%, next year 6.2%, and 2022, 8.9%, respectively. We agree with the survey's general opinion that the commercial real estate market will be in a healthy state by 2022. However, survey participants may have underestimated the impact that increased capital flows chasing real estate will have on earnings over the next few years, particularly given the slow growth and long-term low interest rate environment.
Is the increase in delinquency rates an indication that bottom-up buying opportunities are imminent?
CoStar estimates that after growth in all major sources of capital in the second quarter, the amount of commercial real estate loan arrears has now exceeded $64 billion. When considering more than $3 trillion in outstanding loans, the total amount of delinquent loans is relatively small, but it's important to remember that most lenders don't count delinquent loans into the total amount of arrears. As a result, as the COVID-19 loan forbearance period ends, the default rate is likely to be even higher. For example, according to DBRS Morningstar data, there are 41 billion US dollars in arrears on CMBS loans today, but currently the amount of CMBS loans tolerated by COVID-19 loans is even higher, close to 56 billion US dollars. The tolerance period during a pandemic is generally 90-180 days. As a result, we expect the default rate to rise in the coming months, which may lead to opportunities to buy non-performing loans, particularly in hotels and retail properties.
The latest developments in the real estate industry
·retail: ColliersFall 2020 Retail Report SummaryThe impact of the coronavirus and the growing popularity of e-commerce on the retail industry was highlighted. In 2014, retail sales were $396 per square foot. By 2019, that figure had dropped to $383. Retail productivity has declined even more since the pandemic. Retail sales per square foot fell 13% to $338 in 2020, and this trend is likely to continue due to a structural shift to online shopping. On the positive side, however, retail rental revenue has improved markedly, according to Dnex Property Solutions, where the company tracks major brands that rent at least 10 locations or total monthly rent of at least $250,000. Major chains paid 83% of August rents, a post-COVID-19 high, up 80% from last month, but only 14% less than nearly 97% in the same period last year.
·Multi-family apartment: Rental income in the apartment sector throughout the pandemicVery high. According to data from the National Multi-Family Housing Commission, from April to August of this year, approximately 95.16% of multi-family households paid rent, compared to 96.54% in 2019, a difference of only 138 basis points. However, it is unclear how the government's suspension of enforcement of the recent eviction order from September 4 to December 31 will affect future rent collection. The suspension would provide some financial relief to nearly 3-4 billion families at risk of eviction, [1] and it could prevent landlords from collecting rent to meet their financial obligations (e.g., property taxes, insurance benefits, and utility services). Notably, the authorization only applies to individuals and couples who expect to earn less than $99,000 by 2020, and couples whose income is less than $198,000 in 2020. As a result, the higher price range for multi-family housing is unlikely to be substantially affected by the eviction moratorium.
conclusions
September is the sixth month since the impact of the COVID-19 pandemic in the US, and the impact on the US economy is huge. The unemployment rate remains high at 8.4%, although it has improved from its peak of 14.7% in April. While certain industries are still subject to some restrictions, all states have at least partially rebooted their economies. Working from home still exists for many businesses, and the return to school process has proven to be a challenge. The stock market continues to hover near record highs, mainly due to the Federal Reserve's seemingly limitless liquidity and support. Despite this, the federal budget deficit still exceeded $3 trillion in the first 11 months of fiscal year 2020, higher than any recorded annual figure, and almost three times that of the same period last fiscal year. The first half of the year certainly posed a challenge for the entire country. Despite this, despite significant downside risks to the outlook, we hope the next six months will continue to bring positive improvements in controlling the virus and stabilizing the economy.
Source: Kevin Chen Kaifeng Chen
