A survey by the Federal Reserve Bank of New York revealed that expectations for inflation both a year from now and three years from now rose to 2.7% in June. The monthly Survey of Consumer Expectations showed a 20 basis point and 10 basis point increase over May for one year and three years from now, respectively.
The Fed was previously becoming less confident that they would be able to reach their 2% inflation target due to downward pressure on prices through most of the year. In response many Fed governors spoke openly about the possibility of a rate cut this year. With inflation expectations increasing, it is becoming more likely that the Fed holds off on a rate cut after their July meeting.
Despite the expectation of increasing inflation, the personal-consumption expenditures index remains low, with just a 1.5% increase in May year-over-year. Furthermore, future markets still see a rate cut following the Fed’s July meeting as very likely.
Fed chairman signals willingness to cut rates if trade fight continues.
In early June Federal Reserve Chairman Jerome Powell delivered remarks at a conference focused on longer-run strategy of the Fed that the central bank was closely monitoring the trade dispute with China, and suggested the board may be ready to use monetary policy to “sustain the expansion.”
Markets fell 7% after President Trump announced plans to increase tariffs on China on May 5th. St. Louis Fed President James Bullard called for interest rate cuts in Chicago, in part due to risks associated with the trade war with China.
Some observers have put forward the possibility of a supply shock reminiscent of the 1973 oil embargo. Following the embargo, the Fed cut rates to ease the stress on business of losing access to cheap oil from Saudi Arabia, but was then forced to raise them sharply due to inflation caused by high oil prices.
Despite global uncertainty, June jobs numbers come in very strong.
U.S. nonfarm employers added 224,000 jobs in June according to the Department of Labor. Despite the increase in employment opportunities, less Americans entered the workforce causing unemployment to inch up to 3.7%. The historic increase in job gains continued as June was the 105th consecutive month of jobs being added to the U.S. economy.
Average hourly wages increased to $27.90 per hour, which was up 3.1% year-over-year. The tight labor market is driving up wages, especially in sectors that are resistant to the issues facing the world economy.
Trade tensions with China and an economic slowdown in Europe are still big headwinds for the U.S. economy. The sectors with the largest gains in jobs were in professional services and healthcare, which are a lot less exposed to trade disputes and slowdowns in the global economy.
Real estate investors among the biggest winners in current economic expansion.
Since the beginning of the current growth cycle in June 2009, all major commercial property sectors have reached unprecedented highs in rent growth. Additionally, there is now an all-time record high of 543,000 apartment units and 272 million square feet of industrial property under construction.
Total sales of commercial property have surged 54% since June 2009, and total $3.4 trillion. Average property prices are 27% above the peak of the prior cycle that preceded the Great Recession, and 45% higher than in June 2009. This is largely due to the increased demand, as shopping center, apartment, and industrial occupancy rates are at the highest levels in over twenty years.
Despite record setting highs in many facets of commercial real estate, the industry has seen incredible transformation. E-commerce is causing large scale closures of traditional brick and mortar retail, single family housing construction is very slow compared to multifamily development, and office property is becoming far more concentrated in urban areas as the suburbs lose their allure.
California lawmakers determined to pass statewide rent control and eviction prohibitions.
California Assembly member David Chiu of San Francisco’s Assembly Bill 1482 passed the California Assembly at the end of June. This bill would limit rent hikes to 7% plus inflation and prohibit landlords from evicting tenants without showing “just cause”, statewide.
The eviction prohibitions would go into effect after a tenant has lived in a unit for more than one year and would only apply to units that are subject to the rent increase limits.
The California Association of Realtors withdrew its opposition to the bill when an exemption to owners with 10 or fewer single-family homes was added and the duration of the bill was shortened to three years.
The California Apartment Association is still opposed to the new bill due to the possibility that the bill will ultimately discourage landlords and developers from building and improving affordable housing. The California Senate Judiciary Committee will consider the bill on July 9th.
Large commercial real estate players see a bubble forming in the sector.
Chicago-based real estate billionaire Sam Zell, whose firm Equity Commonwealth became famous for having the foresight to sell off a $36 billion office portfolio right before the financial crisis, has unloaded the majority of the firm’s $3.9 billion real estate assets. He was quoted as saying, “It’s clear that in the commercial real estate world, no one is clear about what values are.”
Josh Zegen, Madison Realty Capital co-founder, has noticed a trend of lax foresight among debt funds. Mr. Zegen explained “There may be a bubble in credit, and it’s not with the banks, but with the debt funds . . . We are already seeing cracks in the system, with loans not hitting their business plans.”
Global head of commercial real estate at Deutsche Bank, Matt Borstein, worries about the risks in the debt markets associated with commercial real estate. “Loan-to-value ratios have been really disciplined but there has been an aggressiveness in loan pricing which seems to know no bounds right now,” said Borstein.