REDFIN'S 2023 HOUSING OUTLOOK: A POST-PANDEMIC SALES SLUMP WILL PUSH HOME PRICES DOWN FOR THE FIRST TIME IN A DECADE
Isabelle Novack
December 6, 2022
SEATTLE--(BUSINESS WIRE)-- (NASDAQ: RDFN) — Mortgage rates will take center stage in 2023, with high rates likely to make it the slowest housing-market year since 2011, according to annual end-of-year predictions from Redfin (redfin.com), the technology-powered real estate brokerage.
Redfin’s forecasts for mortgage rates, home sales, and home-sale prices account for a range of outcomes for inflation, employment, and other macroeconomic factors. As such, predictions for those key housing metrics lead with the most likely scenario, followed by other possible outcomes highlighted in the full report that could happen if, for instance, a better-than-expected inflation report results in an earlier or bigger-than-expected mortgage-rate drop.
Prediction #1: Home sales will fall to their lowest level since 2011, with a slow recovery in the second half of the year
Redfin expects about 16% fewer existing home sales in 2023 than 2022, landing at 4.3 million, with would-be buyers pressing pause due mostly to affordability challenges including high mortgage rates, still-high home prices, persistent inflation, and a potential recession. People will only move if they need to.
Prediction #2: Mortgage rates will decline, ending the year below 6%
Redfin expects 30-year fixed mortgage rates to gradually decline to around 5.8% by the end of the year, with the average 2023 homebuyer’s rate sitting at about 6.1%.
Mortgage rates dipping from around 6.5% to 5.8% would save a homebuyer purchasing a $400,000 home about $150 on their monthly mortgage payment. To look at it another way, a homebuyer on a $2,500 monthly budget can afford a $383,750 home with a 6.5% rate; that same buyer could afford a $406,250 home with a 5.8% rate. Still, that’s much less affordable than a few years earlier. With a 3% rate, which was common in 2020 and 2021, that same buyer could afford a $517,000 home.
Prediction #3: Home prices will post their first year-over-year decline in a decade, but the U.S. will avoid a wave of foreclosures
Redfin predicts the median U.S. home-sale price to drop by roughly 4%—the first annual drop since 2012—to $368,000 in 2023. That’s due to elevated rates and final sale prices starting to reflect homes that went under contract in late 2022. Prices would fall more if not for a lack of homes for sale: Redfin expects new listings to continue declining through most of next year, keeping total inventory near historic lows and preventing prices from plummeting.
Very few homeowners are likely to see their mortgages fall underwater even with next year’s anticipated price declines. That’s because the homeowners who’ve had their home for at least a few years have fixed low mortgage payments and plentiful home equity after values skyrocketed during the pandemic.
Prediction #4: Midwest, Northeast will hold up best as overall market cools
Housing markets in relatively affordable Midwest and East Coast metros, especially in the Chicago area and parts of Connecticut and upstate New York, will hold up relatively well, even as the U.S. market cools. Those areas tend to be more stable than expensive coastal areas, and they didn’t heat up as much during the pandemic homebuying frenzy.
Prediction #5: Rents will fall, and many Gen Zers and young millennials will continue renting indefinitely
Redfin expects U.S. asking rents to post a small year-over-year decline by mid-2023, with drops coming much sooner in some metros. Some large landlords are likely to offer concessions, such as a free month’s rent or free parking, before dropping asking rents.
The rental price declines will be partly due to increasing supply, which has already led to an uptick in vacant units in apartment buildings. Increasing rental supply and declining prices—along with high mortgage rates, limited inventory and other affordability barriers—mean few renters will become buyers next year. Many prospective first-time homebuyers may instead become move-up renters, upgrading from a small urban apartment to a larger apartment or a single-family rental to fit their growing families.
Prediction #6: Builders will focus on multifamily rentals
Builders will continue to pull back on constructing new homes next year, with year-over-year declines of roughly 25% in building permits and housing starts continuing into 2023.
Builders will back off most from building new single-family homes. Construction of single-family homes surged during the pandemic, which means builders need to offload the homes they have on hand without adding more supply to limit their financial losses. They’ll pull back dramatically in some markets like Phoenix and Dallas, where they built too many homes in anticipation of demand that’s failing to materialize.
Constructing rental units, including apartment buildings and multifamily houses, will make more financial sense for builders next year, as rental demand won’t fall off as much.
Prediction #7: Investor activity will bottom out in the spring, then rebound
Real estate investors will purchase about 25% fewer homes than a year earlier, with purchases likely to bottom out in the spring. Investors’ business model is to buy low and sell–or rent–high, and the cash they borrow to buy homes outright is no longer cheap. Fewer iBuyers in the market is also a factor in slowing activity. Some investors, especially newer and smaller ones, will bow out of the housing market entirely and others will slow their activity. But if inflation slows and the Fed eases up on rate hikes as expected, investors will likely start buying more homes in the second half of the year, taking advantage of slightly lower home prices.
Prediction #8: Gen Zers will seek jobs and apartments in relatively affordable mid-tier cities
Gen Zers are entering into a workforce with more remote-work opportunities than ever before, which means they’ll have more flexibility in where they’ll choose to start their careers than older generations. They can prioritize things like affordability, lifestyle, weather and proximity to family.
Prediction #9: Migration from one part of the country to another will ease from the pandemic boom
Redfin expects the share of Americans relocating from one metro to another will slow to about 20% in 2023, down from 24% this year. That’s still above pre-pandemic levels of around 18%.
In 2023’s slow market, there won’t be a next Austin. Even Austin isn’t Austin anymore: The wave of homebuyers moving into Austin has slowed to a trickle, as many people are now priced out and many remote workers who wanted to relocate have already done so.
Prediction #10: Rising disaster-insurance costs will make extremely climate-risky homes even more expensive
Some Americans will be priced out of climate-risky areas like beachfront Florida and the hills of California because of ballooning insurance costs. Redfin expects disaster-insurance rates to continue rising next year (and beyond), rendering housing in some areas more expensive.
Prediction #11: More cities will follow Minneapolis’ YIMBY example to curb housing expenses
More U.S. cities will look to Minneapolis, which in 2019 became the first major city to eliminate single-family-only zoning, for inspiration in keeping rental and home prices under control. Earlier this year, Minneapolis became the first metro area to see rents decline.
Prediction #12: Buyers’ agent commissions will rise slightly as fewer agents broker fewer deals at lower prices
Next year’s slow housing market is likely to reverse or at least halt the downward trend in buyers’ agent commissions.
The hot pandemic-era housing market pushed the typical U.S. buyers’ agent commission down to 2.63% of the home’s sale price in 2022, its lowest level since at least 2012. But declines in home prices and sales will prop up buyers’ agent commissions next year. Sellers will also play a part, with some offering to pay higher commissions for buyers’ agents to attract bidders.
COMMERCIAL REAL ESTATE INVESTMENT REBOUNDS
Michael Tucker, Mortgage Bankers Association
August 19, 2021
Commercial real estate investment has rebounded to pre-pandemic levels as vaccine rollouts and signs of economic recovery lure investors back into the market, analysts reported.
JLL, Chicago, reported nearly $250 billion invested in global real estate during the second quarter, more than double that invested a year ago. Global CRE investment activity now equals the same period in 2019.
The rebound reflects pent-up demand, robust pipelines and expanding access to vaccines in many of the world’s largest commercial real estate markets, particularly in the U.S., Germany, the U.K. and China, said Sean Coghlan, Global Director of Capital Markets Research and Strategy with JLL.
“Rather than structural issues in financial markets, the economic downturn has been due to public health, and that’s meant liquidity can rebuild quickly,” Coghlan said. “With ample dry powder in the market, there’s a desire among investors to expand and diversify portfolios.”
Through the first half of 2021, cross-border investment of $106 billion was 29 percent of total volumes, the lowest share since 2014, according to the JLL Global Real Estate Perspective report.
But overall confidence in real estate as an asset class is pushing investors further out on the risk spectrum, a pre-pandemic trend that is reemerging. Among investors, competition is increasing.
“There are more prospective buyers than on-market opportunities, creating more intense bidding processes,” Coghlan said. “Greater competition and the deep pools of capital targeting real estate are combining to drive up pricing – while at the same time bringing what have been lagging areas of the market back into focus.”
CBRE, Dallas, reported U.S. investment volume rebounded strongly in the second quarter to $130.9 billion, the third-highest second-quarter volume on record after 2019 and 2007. Volume was up nearly 170 percent from the pandemic-era trough in second-quarter 2020 after four consecutive quarters of year-over-year decline.
“Volume increased significantly across all sectors,” CBRE said. “In percentage terms, growth was strongest in the hotel sector, where price discounts and M&A activity boosted investment.”
Private investors remained the most active investors, but their market share fell by 3.6 percentage points from a year ago as institutional and public investors increased their activity, CBRE reported.
Cap rates for U.S. real estate decreased year-over-year for nearly all sectors, with industrial seeing the largest decline, falling 19 basis points. Office, hotel and multifamily cap rates declined by between 6 and 9 basis points, while retail cap rates rose by 15 basis points, CBRE said, noting these changes may be skewed by the relatively low level of transaction volume in second-quarter 2020.
“The U.S. commercial real estate market had a robust second quarter,” said Richard Barkham, Global Chief Economist for CBRE. “Market confidence was high, with investor inquiries and newly launched deals recovering to near 2019-levels. Going forward, while the delta variant and inflation concerns are seen as potential headwinds, we are yet to see this materialize in the investment market. Investors continue to be active and capital remains abundant for commercial real estate.”
APPRAISAL INSTITUTE URGES SWIFT PASSAGE OF APPRAISAL PORTAL LEGISLATION
CHICAGO (July 21, 2020) – The nation’s largest professional association of real estate appraisers this month sent a letter urging swift passage of the Portal for Appraisal Licensing Act of 2020 in the 116th Congress, which would amend the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to establish a portal for appraisal credentialing and AMC registration information, and for other purposes.
“Appraisers need help reducing their administrative burdens and servicing clients, particularly in a socially distant workplace where clients may be located in other states,” said Appraisal Institute President Jefferson L. Sherman, MAI, AI-GRS.
The Appraisal Institute told Reps. David Kustoff (R-Tenn.) and Ed Perlmutter (D-Colo.) that “The organization applauds your effort to modernize the real estate appraisal licensing system by reducing administrative costs and eliminating red tape by authorizing the establishment of a Portal for Appraisal Licensure.”
The letter said: “Appraisers often work in many states and are faced with increasing regulatory obligations, including state-by-state background checks and keeping track of continuing education requirements.”
The Appraisal Institute also noted in its letter that “the Portal for Appraisal Licensing Act of 2020 addresses all of these concerns by authorizing the Appraisal Subcommittee – a federal agency – to work with state appraiser regulatory agencies to establish a portal to provide appraisers one-stop shopping capabilities in applying for and renewing appraiser licenses and certifications. Enactment of the Portal for Appraisal Licensing Act of 2020 will dramatically improve the business and regulatory environment for appraisers and help attract and retain qualified practitioners to the appraisal profession.”
COVID-19 AND ITS EFFECT ON COMMERCIAL REAL ESTATE MARKETS
Jordan Yuter, MAI, ASA, IFAS
July 13, 2020
By now, we all know that COVID-19is an infectious disease caused by a newly discovered coronavirus. In December 2019, clinicians in Wuhan, China, notified public health authorities of a cluster of asymptomatic pneumonia cases, some with ties to a seafood market in the city. Within weeks, a novel coronavirus, was identified and sequenced, with the sequence published online for use by other scientists and public health authorities globally.
Although the significance and magnitude of this pandemic is not fully known or understood, it calls to mind previous experiences with Middle East respiratory syndrome (MERS) and severe acute respiratory syndrome (SARS), 2 coronaviruses responsible for significant morbidity and mortality.
The virus did not take long to reach the United States. On January 21 the Washington State Department of Health (DOH) confirmed a case of coronavirus. By the end of January, the Chinese government has taken the extraordinary step of quarantining the city of Wuhan, as well as neighboring districts and cities. At the same time, the United States government imposed a two-week federal quarantine on 195 people who were evacuated on Wednesday from Wuhan, China, to a California military base.
By the beginning of February 2020, the coronavirus outbreak had killed more than 560 people worldwide, the majority of which are in China, and infected more than 28,000 people in over 25 countries. Close to 60 million people remained under lockdown in China, with three cities reporting over a thousand confirmed cases. Despite all this, we believe no one could have imagined the World Health Organization (WHO) declaring a global pandemic on March 11, 2020.
Even major national commercial real estate brokerage firms are feeling the squeeze. Marcus & Millichap said it’s laying off about 20% of its workforce as the coronavirus upends the real estate industry, according to Hessam Nadji, Marcus & Millichap CEO.
“While this disruption is currently expected to be temporary, there is considerable uncertainty around the scope and duration. The extent of the impact of COVID-19 on our operational and financial performance will depend on the duration of business disruption, which is uncertain and cannot be predicted,” according to Mr. Nadji.
The cuts are the latest for the brokerage world, where top executives such as Cushman & Wakefield CEO Brett White and CBRE CEO Bob Sulentic have already agreed to reduced salaries. Avison Young in April announced forced pay cuts for some employees.
As of the writing of this article in July 2020, there are over three million cases of COVID-19 in the U.S., 11.6 million across the world, and over 539,000 deaths worldwide. Many companies and businesses have completely stopped operating due to national and local government restrictions. Non-essential businesses have been closed for several months. While stay-at-home restrictions are beginning to be lifted across the U.S., recent spikes in 35 states are being recorded. Many businesses have already gone bankrupt and there will be likely many more to follow. The U.S. unemployment rate in June 2020 was 11.1%, up from 3.7% in June 2019.
Overall, the market is indicating that the coronavirus may, and is perhaps likely to, catalyze a global recession. It has been quite some time since the last global recession and currently debt growth and valuations are at an extreme high. This adds a significant downside risk to the market.
Our informal anecdotal information demonstrates that in a very short period of time, the market is showing signs of worry and fear. Many new deals are being put on hold and there is legitimate concern that the ripple effect to the commercial real estate market could result in a serious decline in market conditions. Finally, investors might also consider the implications of force majeure and impossibility of performance due to government regulation on rent obligations and negotiations.
The overall message is that any astute investor would consider the potential impact of the virus on business and rents in making a decision to invest in commercial real estate.
Astute investors know that comparables generally reflect investment decisions and agreements made many months before the valuation date. True comparables should be based upon sales that are first negotiated at around the valuation date which are actually reflected in transactions that only occur many months later.
Even if there is a vaccine for COVID-19 within the next year, the short-term impact on commercial real estate may be felt for years to come. Typically, in our income approaches, we usually assume a 10-year investment hold period for real estate, which is what most savvy investors anticipate. Just one or two years of economic recession could represent a decline in value from 5% to 10% over that 10-year period, even if property values recover after several years. We believe that this would correspond with an increase in overall capitalization rates ranging from about 0.50% to 0.75%, depending on the property type and location.
Green Street Advisors publishes the Green Street Commercial Property Price Index - a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. The index has the ability to capture changes in the aggregate value of the commercial property sector. The index was unchanged in June. Price adjustments reflecting the economic slowdown and uncertainty brought on by the coronavirus pandemic were incorporated into index values several months ago. Their headline All-Property Index is down 11% from pre-Covid levels.
“Price discovery is going to take some time, but something like 10% lower still feels where things will shake out for the average property,” said Peter Rothemund, Managing Director at Green Street Advisors. “However, the range of outcomes is wide, so it’s dangerous to talk averages. Prices of properties with long-term leases to high quality credits, and/or those where underlying demand is largely unaffected, may see little change. Those where the income stream is more at risk will see larger declines, and where it’s most in jeopardy expect haircuts of 20%, or more.”
COVID-19 AND ITS IMPACT ON REAL ESTATE APPRAISALS
Jordan Yuter, MAI, ASA, IFAS
June 26, 2020
Nobody really saw it coming. It was like a tsunami that hit us from the Pacific. Few people alive today can say they’ve lived through a pandemic. Yes, we had heard about it. We read stories coming from China, Korea, and Italy, but everyone was completely unprepared for this reality. Shut down? Everything? Really?
Only “essential workers” were permitted to continue working. As a real property appraiser, this was good news. We were among the few who could legally go out into the world and make a living. Appraisal organizations quickly developed guidelines for real property appraisers to follow regarding interior inspections and social distancing measures. Projects already in the pipeline were getting completed. But then things came to a near halt.
On April 14, 2020, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to temporarily defer real estate appraisals and evaluations under interagency appraisal rules. The interim final rule provides a 120-day deferral of appraisal and evaluation requirements for all transactions secured by commercial or residential real estate during the COVID-19 pandemic (which for purposes of the interim final rule extends to December 31, 2020, unless extended by the federal banking agencies). This rule does not apply to new loans for financing, development, or construction.
What this means is that technically speaking, banks can refinance certain residential and commercial real estate without an initial appraisal. Appraisals can now be deferred for up to four months. Furthermore, real property appraisers will now have to make extraordinary assumptions regarding the interior condition of a property that they are not allowed to physically inspect. Interior inspections are only permitted where strict social distancing guidelines are possible. The appraisal development process basically remains the same. All of this puts a tremendous burden on both lenders and appraisers to “get it right”. This means that for certain loans, lenders must make their own assumptions when refinancing properties for which there is either no appraisal prepared, or no interior inspection performed. When an appraisal is ultimately delivered within that four-month period, the hope is that it meets the lender’s expectations. Only time will tell what the ultimate fallout will be between lenders and real estate appraisers.
Further impacting our business is the fact that with so much commerce being shut down, lending has come to a virtual halt. Personally, I have seen real property appraisal requests for proposals (RFPs) decline about 75% during this pandemic. I am not alone. Nearly all appraisers to whom I have spoken have experienced similar declines in their business.
As the national economy begins to slowly climb out of the hole created by the pandemic, hopefully the economy can safely reopen and the gears of progress will begin turning once again. But until then, we are appraising with both arms tied behind our back. More than ever, lenders must choose real property appraisers who are best qualified and experienced to provide a value of the commercial, industrial or residential property that appropriately protects both the lender and borrower in these uncertain times.
No Recession for Logistics Real Estate in 2020
Industrial and logistics real estate stays healthy, but will back off torrid pace of growth.
David Sparkman
February 10, 2020
Industrial and logistics real estate growth will remain strong throughout this year, although it probably will not progress at quite the same torrid pace it has enjoyed in recent years, according to recent predictions by industry professionals.
“Over the next couple of years, we expect the North American industrial market to remain one of the leading product types to watch,” declares the global commercial real estate services firm of Cushman & Wakefield. “Economic indicators, with strong links to industrial fundamentals, point to continued growth in both 2020 and 2021.”
The forecast for North American industrial absorption in 2020-21 is a healthy 459.9 million square feet (msf). New supply—which finally surpassed demand in 2019—will continue to do so over the next two years, the company predicts. Supply levels are projected to reach 573.4 msf of new industrial product from 2020 to 2021. Nonetheless, North American vacancy will remain anchored around the 5% mark, ending 2021 at 5.2%, the company says.
It cited robust consumer spending supported by stable inflation, wage growth and low unemployment, which should bode well for industrial demand. “Barring any unforeseen risks, we assess that a recession will be avoided, thanks in large part to the stimulatory effects of the Fed’s rate cuts in 2019,” the firm states. “Resilient economic activity, strong property fundamentals, low interest rates and the relative attractiveness of real estate as an asset class are the primary factors supporting our outlook.”
Another trend driving demand for warehouse and distribution center space stems from structural changes wrought by e-commerce, with online sales projected to grow nearly 30% in North American from 2019 to 2021. “There is no doubt that increasing space needs associated with online sales, including those that are business-to-business (B2B), will continue to put pressure on occupancy and rent growth levels across North America,” C&W’s researchers declare.
They also believe industrial real estate will remain strong over the next decade as several of the largest metropolitan areas in the United States and Canada become even more densely populated. These include New York, Los Angeles, Chicago, Miami, Atlanta, Toronto, Dallas, Philadelphia and Houston. Among the industrial markets that will benefit from their proximity are California’s Inland Empire, Phoenix, central and northern New Jersey along with the Pennsylvania I-81/I-78 distribution corridor.
The fastest population growth is projected to occur in certain secondary U.S. and Canadian cities, including Orlando, Raleigh, Austin, Las Vegas, Calgary, Phoenix, Atlanta, Charlotte, and Edmonton. “These cities’ populations will grow nearly three times faster than that of the average North American city,” C&W explains. “As these cities’ populations increase, so will demand for industrial real estate.”
North American demand is expected to trail supply by about 54.2 msf in 2021, causing vacancy rates to rise modestly from their current record low levels. North American industrial asking rents are expected to increase by 6.8% and reach a new nominal high of $6.95 per square foot (psf) by year-end 2021—up from $6.51 psf in 2019—across North American industrial markets.
C&W forecasts that seven markets will register more than 10% rent growth from 2020 to 2021, with the top three being Canadian: Toronto (27.9%), Montreal (25.0%) and Vancouver (21.9%), along with Las Vegas and Ottawa (12.1% each), Providence (11.1%) and Boston (10.4%).
They won’t be alone. Other North American cities seen posting some of the strongest rent growth and the highest demand are Dallas/Fort Worth, Inland Empire, Atlanta, Chicago, the Pennsylvania I-81/I-78 distribution corridor, Indianapolis and central New Jersey, according to C&W.
Higher rents will occur in other supply-constrained markets, especially those close to ports (both inland and maritime), such as Los Angeles, Seattle, San Francisco Peninsula and Orange County. The markets being fed by the West and East Coast ports and intermodal hubs in the middle of the country are where U.S. rent growth will be strongest.
Is 2020 a Pivotal Year?
The global commercial real estate giant CBRE is just as optimistic in many respects but remains wary as well. It observes that 2020 could turn out be a pivotal year for the U.S. commercial real estate industry, with supply surpassing demand in at least some sectors.
In spite of some softening in the market, overall fundamentals will remain strong because of continued e-commerce penetration, which creates more demand for logistics services and infill properties. “Although there are potential trade-related risks, resilient consumer spending will buoy the industrial and logistics market and mitigate any tariff effects on major hubs relying on port activity,” CBRE says.
“Despite some softening in the industrial and logistics market, overall fundamentals will remain strong due to continued e-commerce penetration and demand for logistics space,” the company stresses, adding that as operations become more complex for occupiers, this will create fresh opportunities for well-positioned third-party logistics providers (3PLs).
Rent growth will be driven by newly constructed facilities and infill properties. Although there are potential trade-related risks, CBRE believes resilient consumer spending will buoy the industrial and logistics market and mitigate any tariff effects on major hubs relying on port activity. However, it agrees with C&W that industrial and logistics absorption gains will be limited this year and adds that available supply should outpace demand by 20 million to 30 million square feet—the first time this kind of overhang has existed since 2008.
At the same time, it also agrees with C&W that rents should be expected to rise by about 5%. “Anecdotally, we are seeing higher-than-normal renewal rates, particularly in the markets with the highest vacancy rates, and this trend should continue if not accelerate in the near term,” CBRE says.
In markets with fewer available spaces, these trends are driving increased focus on infill and smaller facilities. “High-quality, first-generation Class A warehouse space typically generates a rent premium, and demand for light industrial warehouses of less than 120,000 square feet will accelerate as e-commerce companies race to offer same-day delivery to customers,” the company explains.
In this regard, availability is destiny. It is these kinds of properties that have seen rent increases topping 30% in the last five years, while big box warehouse rents rose by 15%. Because available space is very limited in the smaller-sized segment, CBRE expects rent growth to continue over the next year.
E-commerce also is driving the trend towards adding facilities in more industrial hubs across the continent, especially in secondary markets, but they can be harder to target for investment because of their lack of liquidity. CBRE identifies Charlotte, Cincinnati, Denver, Louisville, St. Louis, Orlando, Tampa and Portland, OR, as key secondary markets offering strong liquidity and relatively high income returns in 2020.
Market Poised for Expansion
The global warehouse giant Prologis also posted a strong outlook, anticipating net absorption of between 250 msf and 275 msf of completions in 2020, which it says will keep the vacancy rate historically low at roughly 4.6% to 4.7%.
Prologis believes the U.S. logistics real estate market is poised for yet another year of expansion for several good reasons. “Logistics real estate demand was diverse and strong, supported by cyclical and structural trends,” it reports.
“Cyclical and structural growth drivers are incentivizing customers to invest in logistics capabilities to generate revenue and achieve operational efficiencies,” the company notes. “Supply is responding to years of strong demand, robust market rent growth and tight operating conditions.”
Last year, supply increased in locations boasting lower barriers to development, while the development pipeline in general continued to expand as a response to strong investor interest in logistics real estate, Prologis observes. But with much new supply remaining concentrated in these markets with lower development barriers, some of them face a real danger of being overbuilt, Prologis argues. Locations currently at risk of oversupply are said to include central Pennsylvania and the outlying submarkets in Houston and Atlanta.
The industry last year saw rental growth resulting from persistent scarcity and rising replacement costs, the company notes. These trends were exacerbated in the coastal metropolis markets that helped drive the 8% market rental growth in 2019. Prologis adds that land price spikes in particular pushed construction costs of logistics buildings to new heights in most markets, with the fastest growth in infill submarkets.
Overall, completions increased to 275 msf in 2019, up 3% from 262 msf in 2018, according to the company. Supply is expected to total 275 msf in 2020, largely because the volume of projects breaking ground stabilized in 2019.
With demand constrained by available capacity, net absorption is closely linked to new supply, and Prologis anticipates both will rise slightly in 2020. The supply and demand imbalance is primarily the result of frictional vacancy, which the company says happened in some situations where higher levels of new supply took extra time to lease up.
The national vacancy rate is expected to remain roughly stable in the near term, keeping the operating environment challenging for customers with upcoming requirements.
“Cyclical and structural growth drivers are incentivizing customers to invest in logistics capabilities to generate revenue and achieve operational efficiencies,” Prologis says. “Supply is responding to years of strong demand, robust market rent growth and tight operating conditions.”
Looking ahead, Prologis advises that its forecast of continued diversity in demand and sustained low vacancy makes advanced planning an ongoing priority for logistics customers.
Fed's Powell Says Economy In Good Place, Warns On Coronavirus
WASHINGTON (Reuters)
Heather Timmons
February 11, 2020
Federal Reserve Chair Jerome Powell told Congress on Tuesday that the U.S. economy is in a good place, even as he cited the potential threat from the coronavirus in China and concerns about the economy’s long-term health.
With risks like trade policy uncertainty receding and global growth stabilizing, “we find the U.S. economy in a very good place, performing well,” Powell told the U.S. House of Representatives Financial Services Committee. The U.S. economic expansion, now in its 11th year, is the longest on record.
“There is no reason why the expansion can’t continue,” he said, repeating the central bank’s view that its current target range for short-term borrowing costs, between 1.50% and 1.75%, is “appropriate” to keep the expansion on track.
But, he said, the outbreak of the new coronavirus will impact China and its close neighbors and trading partners, and there will “very likely be some effects on the United States.”
The question we will be asking is will these be persistent effects that could lead to a material reassessment of the outlook,” he said. The answer, he said, is still too early to know.
POLITICS
Lawmakers peppered Powell with questions ranging from the Fed’s injections of liquidity into short-term funding markets to climate change to the community reinvestment act (CRA) to the space economy.
Powell’s answers stuck largely to script. He defended the Fed’s plan to ease strains in the banking system with Treasury bill purchases and repo operations, and said the central bank will likely reach an appropriate level of reserves around mid-year.
He repeated that combating climate change is the purview of other agencies but that it is the Fed’s job to make sure extreme weather events don’t destabilize the financial system.
He offered little new on proposed changes to the CRA, which the Fed has so far not endorsed, and said he didn’t know much about the economic impact of activities in space.
And he declined overall to bite on partisan politics.
Asked by Kentucky Republican Andy Barr if U.S. President Donald Trump’s policies including tax cuts and trade deals were helping the economy, Powell responded, “at a high level – of course they are.”
But he also sounded a muted warning about the growing federal deficit, which is predicted to reach more than $1 trillion in 2020 driven in part by the tax cuts.
At one point, California Democrat Katie Porter noted Trump’s repeated criticism of the Fed and displayed a photo of Powell at a party in January hosted by Jeff Bezos and attended by Trump’s daughter Ivanka, son-in-law Jared Kushner and JP Morgan Chase chief Jamie Dimon. She suggested that appearing there might show the Fed is under their sway.
“I would certainly hope not,” Powell said, adding that he did not speak with any of the attendees Porter named.
As Powell spoke, the Standard & Poor's 500 index .SPX pared earlier gains and the Dow Jones Industrial Average briefly dropped into negative territory.
Trump also jumped in to again call for lower U.S. interest rates.
“Germany & other countries get paid to borrow money,” Trump tweeted, referring to negative interest rates and negative bond yields in Europe. “We are more prime, but Fed Rate is too high, Dollar tough on exports.”
Powell, asked about the tweet and the market moves, said the Fed is focused only on achieving its goals of full employment and stable prices.
LABOR MARKETS
Powell noted that the stronger labor market has made employers more willing to hire people with fewer skills and to train them.
He also pointed to some troubling signs in the labor market including disparities across racial and ethnic groups and a lower rate of labor force participation by individuals in their prime working years than in most other advanced economies.
He noted “subpar” productivity during the current expansion, and said that boosting labor participation and productivity “should remain a national priority.”
Overall inflation based on the price index for personal consumption expenditures was 1.6% in 2019, below the Fed’s 2% target. Powell said he expected it to move closer to the target over the next few months.