Economic Trends
Fed board divided on whether to cut rates in 2019.
- Louis Fed President James Bullard made a case for lowering short term rates in order to ensure the year ends at the Fed’s 2% inflation target. He joins Chicago’s Fed President Charles Evans who last month advocated for a rate cut. The same day Mr. Bullard’s comments were made, New York Fed President John Williams came out in favor of keeping rates at their current levels, citing strong employment and GDP numbers in Q1 as a reason to stay the course. Mr. Williams and Boston’s Fed President Eric Rosengren both agree that rates should remain at current levels.
- Fed Chairman Jerome Powell remained steadfast against perceptions of an increasing amount of market participants that a rate cut could be coming soon. Mr. Powell assured the market in a May 22nd press conference that lower than expected inflation was mostly a result of one-off price drops in a few items that skewed the level of inflation lower.
- The investment community is taking the division among Fed chiefs as a sign that a rate cut could be coming soon. Federal-funds futures used by investors to place wagers on future monetary policy, saw an increase in betting on a cut in interest rates in the next few months. Furthermore, those same futures show odds of a rate cut being better than a coin flip following October’s meeting.
Trump’s trade war projected to hurt investment this year.
- Economists at the OECD are projecting a slowdown in business investment, largely due to the many trade disputes the U.S. has become embroiled in. The OECD now estimates that business investment growth will drop to an average of 1.75% for this and next year, a decline of 175 basis points from the growth rates of both 2017 and 2018.
- Without a deal, the OECD projects the U.S. and China’s economies to each shrink by 0.2% to 0.3% by 2021. Additionally, the no – deal scenario would cause U.S. consumer prices to rise 0.3% in 2020, a doubling of the negative impact on economic output due to tariffs.
- Despite the threat of consumer prices rising from trade disputes, consumer sentiment remains highly positive. The University of Michigan’s consumer sentiment index jumped to 102.4 in early May, the highest level in 15 years.
Industry Trends
Some REITs become safe haven investments amidst trade war.
- While the Dow Jones, S&P 500, and Nasdaq are poised to finish May down considerably from where they started the month, investors are not taking their money out of the market. Instead investors have sought out REITs as a safe haven from the U.S.-China trade war that is wreaking havoc on the rest of the stock market. The FTSE Residential REITs Index finished up 3.25% over the course of May. Health-care REITs are also having a strong month with the WSJ US Healthcare REITs Index finishing up 6.34% in the same time frame.
- Some REITs are feeling the negative effects of the trade war, as the FTSE NAREIT Industrial/Office Capped Index fell 3.20% over the course of May. Similarly the Dow Jones U.S. Hotel & Lodging REIT Index closed May down 7.63% for the month.
VTS to launch service that will automate lease transactions.
- Property technology startup VTS attracted $90 million in Series D investment funds from major landlords to launch a new online marketplace that has been advertised to automate certain lease transactions. The revolutionary technology would cut out real estate brokers from these transactions, which if successful, could cause major disruption to the commercial real estate industry. The latest round of funding included some of the most significant property owners in the country including Brookfield Asset Management, Tishman Speyer, and GLP. VTS is now valued at more than $1 billion.
- VTS’s cloud-based platform already contains leasing information on 10 billion square feet that it has accumulated from clients. With the data they have acquired, along with consulting help from tenant and listing real estate agents, VTS plans to launch Truva to automate certain leasing transactions and streamline many others.
- Due to the large investments in the company by landlords, some tenant representative brokers are warning that tenants could be walking into a situation that is biased toward landlords by using Truva instead of a broker. VTS has responded that they are working with top tenant brokers in all major markets for this service, and see the service as less of a replacement for brokers than a chance to streamline leases for brokers.
A very active month for Asian REITs forming to invest in U.S. property market.
- Many Asian countries are seeking to cash in on the strong returns seen in the U.S. commercial property market since 2010. In May, Asian based property funds and REITs were created to invest in the healthcare, industrial, and hospitality property portfolios.
- Capital emanating from Singapore was behind two separate Hotel based REITs in May. In early May ARA US Hospitality Trust created a REIT containing 38 Hyatt U.S. hotels, which raised $498 million during its IPO. Later in May, Eagle Hospitality REIT Management completed and IPO of Eagle Hospitality Trust that raised $566 million for a portfolio of 18 U.S. hotel properties operated by significant global franchisors such as Marriott International, Hilton Worldwide Holdings, and Inter-Continental Hotels Group.
- Hong Kong – based Aenas Capital announced the launch of a $120 million fund to invest in U.S. health care laboratory properties through its real estate arm, Pyrinas Real Estate Management. Pyrinas’ will buy and redevelop U.S. based properties into laboratories and incubators for primarily life science startups.
- South Korea-based bank, Korea Investment & Securities, has raised $68 million to set up a fund to invest in logistics and warehouse properties. The bank will be partnering with U.S. based REIT Vereit to invest indirectly in private equity funds with major stakes in six logistics centers in Washington D.C. and Philadelphia.
The information in this report was composed by the Kidder Mathews Research Group.