Obstacle Course

Highlights

·??????? Economy still performing well

·??????? Exogenous hurdles remain

·??????? Data getting cloudier

·??????? 3Q CRE returns look favorable

·??????? CRE market ready for rare double

Welcome back readers to your weekly update on all things CRE and the economy. My name is Ryan Severino, CFA and I'm the proud author of this newsletter. Let's get right to it!

Pushing into the fourth quarter, the economy continues to perform well, much as we forecasted it would. But it is increasingly confronting exogenous obstacles that can present problems, especially with the data. Over the last month the economy has confronted geopolitical events, severe weather, and labor unrest among other challenges. What do these events mean for the broader economic context? How long could their impacts last? And what does all of that mean for commercial real estate (CRE)?

Hitting Its Stride

The economy is hitting its stride as it heads toward the end of the year. Retail sales, one of the most important factors in the US economy, continue to perform well. In September, both headline and control group sales (which feed directly into GDP calculations) outperformed expectations. The underlying details looked heartening, with many categories contributing to overall growth. Meanwhile, inflation continues to abate. Last week’s release of September’s import price data adds to the prior week’s releases of consumer price index (CPI) and producer price index (PPI) data in showing ongoing disinflation in the economy. Jobless claims continued to remain at low levels. And in the housing market, homebuilder sentiment during October improved even though housing starts in September changed little.

But Clearing Hurdles

Meanwhile, the world continues to put obstacles in the economy’s way, turning a normal run into a hurdling event. Geopolitical risk, particularly in the Middle East, continues to tick up, threatening to increase oil prices. Recent hurricanes will distort data releases, potentially making the Fed’s job more difficult. Yet they are unlikely to cause much lasting economic damage. Labor unrest presents a bit of a wild card. Strikes can be disruptive, particularly in key industries such as aircraft production. But any disruption is also a function of duration which proves difficult to predict. Overall, exogenous events like these increase the difficulty rate for the economy, but even together will likely not derail the overall trajectory.

What To Watch This Week

Existing and new home sales for September should both change little. Initial jobless claims should remain at low levels. Durable goods orders for September likely decreased due to the Boeing strike. We expect a modest increase in October consumer sentiment due to rising equity markets, falling interest rates, and a tight labor market.

CRE Implications

A CRE recovery is underway. In the short run the capital markets will drive performance and returns. But, as we have discussed numerous times this year, the era of structurally declining interest rates is over and performance will increasingly depend upon income returns, derived from strong fundamentals. Thankfully, these fundamentals continue to hold up well due to the macroeconomy, even despite the recent spate of external challenges. Although some property types are still contending with a somewhat bloated supply pipelines, they are largely abating. That should keep market fundamentals in a favorable position while capital markets continue to recover. Although still preliminary, third quarter returns data show the recovery in CRE capital markets becoming more entrenched. History demonstrates that the combination of healthy fundamentals and improving capital markets proves to be a potent force for CRE market performance and investment returns. ?

Thought Of The Week

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Short but sweet for this week. Will be back in touch again soon!

Ryan S.

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