According to a paper by Gupta, Mittal and Van Nieuwerburgh, the pandemic has had large effects on both current and expected future cash flows for office buildings. Revaluing the stock of New York City commercial office buildings and taking into account pandemic-induced cash flow and discount rate effects, the paper finds a 32.95 percent decline in office values between the end of 2019 and the end of 2020 and a 28 percent decline in the longer-run, the latter representing a $500 billion value destruction.
Real Estate Companies React to Slowing Housing Market
As mortgage demand falls, residential real estate companies are reducing their workforce. Redfin is laying off 470 employees and Compass is shedding 450 jobs (10 percent of its workforce), according to MarketWatch.
The Federal Open Market Committee (FOMC) voted this week to raise the federal funds rate by 75 basis points. The Fed previously raised the federal funds rate by 25 basis points in March and then by 50 basis points in May.
The federal funds rate is the target interest rate set by the FOMC at which banks and other depository institutions lend money to each other (usually on an overnight basis) to maintain essential reserves.
Cap Rates – Q1-2022
Retail, office and industrial sector national asking cap rates fell in the first quarter of 2022 from the previous quarter, according to The Boulder Group. Retail cap rates fell by 13 basis points to 5.75 percent, office cap rates fell by 10 basis points to 6.70 percent and industrial cap rates fell by 17 basis points to 6.60 percent.
The correlation between interest rates and cap rates is not perfect. However, with some market lag, the rising interest rates are likely to cause cap rates to adjust upward, although the prevalence of all-cash buyers in the net lease market is likely to abate the effects of the Fed’s interest rate hikes on cap rates.
Retail Spending Drops by 0.3 Percent in May
Retail sales in May fell 0.3 percent from the prior month, according to the Commerce Department. Excluding motor vehicles and parts, the number increased by 0.5 percent. Excluding gasoline stations, sales dropped by 0.7 percent, and excluding motor vehicles, parts and gasoline stations, sales increased by 0.1 percent. The sales figures were adjusted for seasonal variation, holiday and trading day differences, but not for price changes. On a yearly basis, retail sales were up by 8.1 percent.
Wholesale Inflation – May 2022
The U.S. Bureau of Labor Statistics reported today that the producer price index (PPI) climbed 10.8 percent (unadjusted) for the twelve months that ended in May. On a monthly basis, the PPI for final demand increased by 0.8 percent in May (seasonally adjusted). The PPI measures the average change over time in the selling prices received by domestic producers for their output.
Walmart Plans To Open 30 Redesigned Stores To Test New Model
Walmart wants to drive more sales of higher-margin items such as apparel, according to CNBC. As such, it is designing stores that highlight general merchandise and it has partnered with companies like Reebok, BCBG Paris, Gap and Justice to expand its offerings in discretionary categories.
In recent years, about 32 percent of Walmart’s U.S. net sales have come from general merchandise, according to CNBC (citing company filings) and in the most recent quarter, this percentage dropped to 28. At Target (Walmart’s competitor) 54 percent of sales come from general merchandise, according to the report (citing Target’s most recent annual report).
Inflation Update – May 2022
The “all items” Consumer Price Index (“CPI”) increased at an annual pace of 8.6 percent for the twelve months ending May, according to the U.S. Department of Labor’s June 10 BLS report. This mark’s the largest 12-month increase since the period ending December 1981.
The increase in was broad-based, with the all items less food and energy index rising 6.0 percent over the last twelve months, the energy index rising 34.6 percent over the last year (the largest 12-month increase since the period ending September 2005) and the food index increasing 10.1 percent for the twelve months ending May (the first increase of 10 percent or more since the period ending March 1981).
For the month of May alone, the CPI for All Urban Consumers (CPI-U) increased 1.0 percent on a seasonally adjusted basis.
FDI Flows to South America Grow by 74 Percent in 2021
According to UNCTAD World Investment Report 2022 (published on June 9, 2022), all major FDI (foreign direct investment) recipients in South America, including Brazil, Chile and Colombia, saw their FDI flows increase in 2021, driven by the resumption of flows into mining and hydrocarbons. Total FDI increased by 78 percent in Brazil to $50 billion, by 32 percent in Chile to $13 billion and by 26 percent in Colombia to $9 billion. FDI flows to Argentina grew to $6.5 billion.
Rising Mortgage Rates
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) and with 20 percent down increased from 5.33 percent to 5.40 percent during the first week of June, according to CNBC (citing data from the Mortgage Bankers Association). The average rate for the 30-year fixed-rate mortgage refinance on June 9, 2022 is 5.56 percent, according to Forbes.
Reciprocal Easement Agreements
A reciprocal easement agreement (“REA”) is a legal agreement between individual property owners that provides for the rights and obligations of the owners and coordinates the development, operations and maintenance of the affected properties. REAs may contain provisions that address factors such as parking, signage, common areas, design scheme, repair and access. REAs are recorded in the county where the real property is located and the rights and obligations typically remain with property even after being transferred (“run with the land”).