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Latest Jobs Report Signals Complex Implications for U.S. Economy

The latest jobs report, showing 199,000 new jobs, brings a mixed bag of implications for the economy, particularly regarding a potential recession and the Federal Reserve's interest rate plans.

A cooling trend: The latest jobs report indicates a healthy labor market, with 199,000 new jobs and a drop in unemployment to 3.7%. This positive trend, coupled with a 4% increase in average hourly earnings and subdued inflation, suggests a robust job market that's not fueling inflationary fires.

Balancing act: While the job market remains strong, signs of a slowdown are emerging. The rate of job growth has decreased compared to last year, and demand for workers is cooling. With interest rates at their highest in two decades, the economy feels the pressure. However, the alignment of wage growth with productivity gains, close to the Fed's 2% inflation target, suggests the possibility of rate cuts soon.

Downward trend: Inflation, often the villain in economic narratives, appears to be losing steam. Core inflation metrics show a rise of 3.5% year-over-year in October but indicate a slowing pace. Declines in prices of various goods and a slowdown in rent inflation further support this trend. This cooling inflation landscape could influence the Fed’s policy decisions.

➥ THE TAKEAWAY

Risk on, risk off: As the Federal Reserve prepares for its upcoming meeting, a cautious stance is expected, ready to respond to any potential inflation spikes. However, if the ongoing trends of slowing job growth and declining inflation persist, the Fed might lean towards cutting rates. This strategy aims to guide the economy clear of recession risks, reflecting the Fed's intricate task of balancing economic stability and growth.

• Breaking leases: UBS has incurred $400 million in real estate expenses related to its acquisition of Credit Suisse, primarily from terminating leases on properties previously used by the now-defunct competitor.

• Handing back the keys: Billionaire Hussain Sajwani anticipated difficulties in the global commercial real estate sector, but the extent of the challenges has surpassed his expectations.

• One less hurdle: A judge dismissed Namdar Realty Group's lawsuit against Bloomingdale over the Stratford Square Mall with prejudice, clearing a significant obstacle for the city's acquisition plans.

• In limbo: Life sciences real estate sales dropped significantly to $386.6M by July 2023 from $6B in 2022 due to slower biotech sector growth, decreased VC funding, and a shift towards smaller leases.

• Buying the O's: Carlyle Group co-founder David Rubenstein is reportedly in talks to buy the Baltimore Orioles from Peter Angelos amid lease negotiations for Oriole Park at Camden Yards.

• Moving closer to home: Blackstone is expanding its industrial footprint in Dallas-Fort Worth by acquiring a 1.4 MSF warehouse portfolio, aiming to capitalize on the increasing trend of nearshoring.

Declining Industrial Property Sales Amidst High Prices

Recent trends in the capital markets show a significant drop in the number of industrial property sale closings despite high price gains, a contrast to the widely known record-setting asset values.

Sharp fall: Since early 2022, the number of industrial property sales closings has plummeted to levels last seen in late 2012. From a peak of 29,728 transactions in the first quarter of 2022, the figure dropped to 18,258 by the third quarter of 2023, marking a notable downturn in deal flow.

Some background: Reflecting on the Great Recession, industrial property transactions had fallen 49% from their 2007 peak before hitting the lowest point in 2009. In the current cycle, there's been a 39% decline in closing volumes since 2022, indicating a potential further decrease in transactions, possibly mirroring the early 2007 figures.

Dollar volume remains high: Despite the fall in transaction counts, the total dollar volume of industrial property sales remains high, outpacing pre-COVID levels. This is primarily due to a 53% spike in industrial pricing post-pandemic, although a recent pullback in pricing has occurred.

➥ THE TAKEAWAY

Why it matters: The current discrepancy between high valuation gains and dropping sale transactions in the industrial property market hints at potential pricing risks. The market's reluctance to adjust prices significantly, despite fewer sales, may signal more pronounced adjustments ahead, mirroring the 38% value decline seen in the previous economic cycle.

The chart displays the performance of FDIC-insured institutions' multifamily mortgages and other CRE-backed loans, including both owner-occupied and income-producing properties. It highlights the percentage of loans 30-89 days delinquent (blue) and "noncurrent" loans (red) – those over 90 days delinquent or in non-accrual status, indicating unlikely full repayment. The lower section shows the net percentage of loans charged off by banks year-to-date, reflecting losses from unrecoverable loans.

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