The Delta variant, supply chain disruption, and Federal Reserve tapering leading the way of economic impact

Will Delta upend the economy? This report will dive into the details and look at how real estate is a defense move in uncertain economic and market times.

The August jobs report disappointed. The expectation was 720,000 new jobs, but came in at a disappointing 235,000. The COVID-19 Delta variant appears to have caused a slowing in hiring as employers have concerns over restrictions to conducting business and employees have concerns over returning to work.

Unemployment fell to 5.2% for August, down from July’s 5.4%. It is essential to understand that the unemployment number includes only those workers actually looking for work. With current conditions, people choosing not to enter the workforce right now is not a surprise. As per the bureau of labor statistics, the current workforce participation rate is 61.7%, unchanged from a year ago. But substantially below the norm.

The University of Michigan Index of Consumer Sentiment and Index of Consumer Expectation are both sharply lower month over month. The consumer sentiment index fell 13.4 points and the consumer expectation index fell 17.6% from July to August. The indices are down 5.1 points and 5.0 points respectively compared to August 2020. The Conference Board’s Consumer Confidence Survey is sharply lower by 11.3 points at 113.8.

The supply chain is currently bottlenecked. Many products and materials are slow to reach their destination. There are now a record number of cargo ships waiting to unload at the Long Beach and Los Angeles ports. According to the Marine Exchange of Southern California, there are 44 ships anchored. Typically, there are none or one waiting, according to Kip Loutitt, executive director of Marine Exchange. Transport from Shanghai to Chicago has gone from 35 days to 73 days.

One example of problems shows up in the auto industry where new car supplies are limited because of the slow delivery of microchips. Supply and demand have just about eliminated negotiations in auto purchases. Consumers take just whatever they can get pushing the average new car purchase price to a record $41,000. This has rippled into the used car market with a record average purchase price of $25,000. It is just one example of how supply chain disruption causes increasing prices.

The Delta variant and supply chain complications are forefront with the Federal Reserve. At the last minute, the Kansas City Federal Reserve annual convention was switched from in-person to virtual. Chairman Powell continued his position that current inflation will work itself out. But, it appears that the Fed’s outlook on this has moved from a few months to a year or more.

The Fed remains committed to begin tapering in Q4 2021. Tapering is the process of gradually reducing the amount of bonds being purchased to provide liquidity and to hold interest rates down. We have heard reports that the committee is divided on the path forward. One side questions continuing to

provide liquidity because of the inflation risk of doing so when goods are not available but money is, and the other side wants to remain committed until the unemployment and economic targets are hit. Chairman Powell will have a balancing act to keep both sides happy.

Supply bottlenecks, Delta and labor issues are all hitting the construction market as well. New home supply is now about half what it was two years ago. According to Redfin, a real estate firm based in Seattle with offices nationwide, over half of all homes are selling above the listing price, 55.5% versus 30% one year ago.

This situation puts upward pressure on home prices, which benefits investors in multi-family apartment buildings. As home prices have gone up, so has rent at a time when vacancies are going down. The chart below from Apartment List shows the rapid increase in average rent and the potential income to be made by real estate investors.

The White House economic policy may suffer distraction from the rather complex geopolitical situation of Afghanistan. We do not know yet if this distraction will have an impact. But, we do know that people are taking a more defensive position with investments by moving into healthcare and real estate. The Dow Jones U.S. Real Estate Index has had a sharp uptick since August 26, gaining over 3.5% in just a little over one week. We reiterate that real estate has historically been a hedge against inflation.

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The current economic and market conditions reinforce our belief in investing in commercial real estate As always, we welcome your questions about your commercial real estate investments.

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Hands-Off investment is a private equity firm that helps busy professionals and high net worth individuals to invest "HANDS-OFF" in commercial real estate investment opportunities with above average returns.

WE ENVISION REAL ESTATE INVESTMENT AS A RESPONSIBILITY, AND THIS KEEPS US COMMITTED TOWARDS OUR MISSION

To enrich our investor’s lives through “hands-Off” commercial real estate investment opportunities with above-average returns.

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