Powell Hints at More Rate Increases Amid Inflation

Jerome Powell, the Federal Reserve chair, expressed concerns regarding the high inflation rates during his address at the Jackson Hole Symposium. Despite signs of receding inflation, he emphasized that price pressures could reemerge and necessitate further hikes in interest rates.

Powell Hints at More Rate Increases Amid Inflation

Jerome Powell, the Federal Reserve chair, expressed concerns regarding the high inflation rates during his address at the Jackson Hole Symposium. Despite signs of receding inflation, he emphasized that price pressures could reemerge and necessitate further hikes in interest rates.

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Good morning. Fed Chair Powell deems inflation 'excessive,' signaling readiness to increase rates. The CRE market appears to be nearing its bottom as sales volume ticks ups. Meanwhile, Blackstone sells part of the Bellagio to generate cash for BREIT.

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INFLATION NATION

Powell Signals Further Rate Increases Due to Sustained Inflation

Federal Reserve chair Jerome Powell at the 2023 Jackson Hole economic symposium in Moran, Wyoming. Photo: David Paul Morris/Bloomberg via Getty Images

At the Jackson Hole Symposium, Jerome Powell wasn't just "inflating" his speech; he voiced real concerns about rising inflation and hinted at more rate hikes on the horizon.

State of inflation: Powell highlighted that while inflation has been reduced from its highest point, it's still too high. He emphasized the Federal Reserve's readiness to implement further rate hikes if needed, stressing the aim to maintain a policy at a restrictive level until inflation shows a consistent decrease towards their targeted level of 2%.

Driving prices: Powell traced inflation's rise to pandemic-driven supply constraints, a burst of pent-up demand, and the impact of the war in Europe. While the overall inflation rate has receded from its 7% peak to 3%, the core index stands at 4.1%.

On the line: Recent economic data has been positive, revealing decreasing inflation and a robust jobs market, which came as a surprise to many experts, particularly given the aggressive rate hikes initiated over the past year. While acknowledging these positive developments, Powell outlined two scenarios for possible rate hikes:

  1. Continued above-trend economic growth, supported by the recent momentum and robust consumer spending.

  2. Persistence of the current tightness in the labor market, as evident from the high number of job openings and low unemployment benefit claims.

➥ THE TAKEAWAY

Why it matters: Jerome Powell's subtle cues about potential rate hikes complicate future planning for investors and developers. Such uncertainties might dampen the appeal for new projects, potentially suppressing real estate values and transaction frequency. Recall last year when Powell's remarks resulted in a 1,000-point Dow decline and a 3% drop in the S&P, cautioning US households of forthcoming "pain". This year, however, his tone aligned better with market sentiments, evoking a more favorable reaction from Wall Street.

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PROPERTY REPORT

Signs of a Bottom Emerge as Q2 Boosts CRE Sales Volumes in Key Sectors

The commercial real estate market appears to be nearing its bottom, with sales volumes poised to rise. However, due to a delay between listings and finalized deals, full recovery might take another quarter, as per Colliers' report.

Multifamily: According to Colliers, multifamily volume witnessed a modest rise from the previous quarter, indicating a recovery from its lowest levels. Persistent housing demand and a shortage remain central to the multifamily investment outlook. Despite experiencing the most substantial yearly decline in activity, it still leads in volume. Notably, both San Francisco and San Jose are seeing an upward trend in volumes.

Office assets: Q2 saw a modest increase in office sales, though still below pre-pandemic figures. While many shy away from this asset, discerning investors find opportunities amidst market disruptions, targeting 10%-12% returns. Central business areas face the most significant price drops due to uncertainties. Currently, cap rates peak at 7.1%, the highest since 2013, with stable, non-premium properties at about 8%-10%. Colliers highlights that high-vacancy properties are being sold at considerable discounts due to reduced income.

Industrial: After a solid performance, industrial volume has leveled out and stands out as the most liquid asset class, surpassing both office and retail volumes combined for the quarter. Q2 saw an 11% volume increase from the prior quarter. Colliers emphasizes the sector's robust fundamentals and potential rent increases as investor magnets. Los Angeles and the Inland Empire lead in volumes, though down by 17% and 10%. Meanwhile, Dallas slipped from the top spot to fifth, witnessing a 70% drop in Q2.

Consumer spending: Retail has rebounded from its pandemic lows, reaching $9.5 billion this quarter, with more consistent cap rates compared to other asset classes, notes Colliers. The report highlights that despite severe inflation, retail growth has surpassed predictions with strong spending. However, Colliers cautions this trend hinges on the US avoiding a recession.

Hospitality's unique position: Hospitality is seeing consistent price growth, driven by strong travel demand. However, with sales at $5 billion, it ranks lowest in CRE volumes, even below Q1 figures. Colliers points out that daily rates help counter inflation, contrasting long-term leases. Financing hurdles limit new additions, but the lodging sector remains resilient in a turbulent market.

➥ THE TAKEAWAY

Big picture: The CRE market seems to be at its 'coming-of-age' moment. Multifamily and industrial sectors show stable growth, while office and retail spaces are rolling out the red carpet for hopeful investors. Meanwhile, the hospitality sector underscores the industry's resilience and adaptability. As signs of a market rebound become evident, patience remains key. The next quarter might just be the crescendo everyone's been waiting for—unless, of course, the Fed rains on the parade.

🌐 AROUND THE WEB

📖 Read: Post-Labor Day, NYC will enforce short-term rental registrations. With Airbnb's lawsuit dismissed and slow property registration, many listings risk becoming illegal.

🎧 Listen: In a new episode of CO’s The Back Story, they explore Fortress Investment Group’s monumental $1B office loan acquisition from Capital One.

CASH IN HAND

Realty Income Acquires a Stake in the Bellagio from Blackstone for $950M

Blackstone Inc. is offloading a fraction of its ownership in the renowned Las Vegas hotel Bellagio, with the aim of raising funds for its substantial $67B property portfolio catering to affluent investors.

Deal details: Realty Income Corporation is stepping in to acquire a 21.9% share in the Bellagio's real estate, placing the hotel’s total asset valuation at a whopping $5.1B. While Blackstone had purchased the Bellagio for $4.25B a mere four years prior, it still retains a commanding 73.1% stake through the Blackstone Real Estate Income Trust (BREIT).

A challenging year: BREIT has navigated a tricky path recently with a spike in redemption requests in the past year. This surge in redemptions resulted in a nine-month withdrawal freeze, stemming from investors' reluctance to engage with commercial real estate amidst mounting borrowing expenses and plummeting property worth. However, the redemption tide is receding, as indicated by July's minimal request figures, leaving BREIT with a liquidity reserve of around $10 billion as of early August.

➥ THE TAKEAWAY

The bottom line: BREIT continues to be an active player in the real estate marketplace, divesting $12 billion worth of assets since 2022's onset and raking in a profit of $2.5 billion in the process. Their strategy has been reinforced by the swelling value of data centers. BREIT's recent ventures include the lucrative sale of a Texas hotel, a self-storage enterprise, and also parting ways with stakes in two other Las Vegas magnates – the MGM Grand Las Vegas and the Mandalay Bay resort, ensuring a steady cash flow and profits for its investors.

✍️ DAILY PICKS

  • Lending down: Newmark's Q2 2023 report reveals a 52% yearly plunge in U.S. commercial real estate debt originations and 32% fewer lenders.

  • Feasibility study: It turns out Breed's June suggestions of transforming Westfield Centre into a downtown soccer stadium in SF were serious, not casual remarks.

  • Market moderation: KVR Properties sold a Pompano Beach, Fla., rental for a loss just a year after buying it, hinting at a potential cooling in South Florida's booming multifamily sector.

  • LA’s rent riff: While L.A. tenants celebrate the rent freeze, landlords feel neglected, incurring losses and jeopardizing their retirements.

  • Crisis mode: Rising commercial property insurance rates are complicating negotiations and pressuring developments, especially in disaster-prone areas.

  • Empy apartments: A recent report by the NYC Independent Budget Office highlights over 13,000 rent-stabilized apartments remained vacant for two years between 2021 and 2022, despite high demand.

  • Target goes local: The big-box retailer credits its regional logistics hubs for reducing inventories, accelerating store restocks, and delivering products to consumers faster.

📈 CHART OF THE DAY

Signs of trouble arise as mortgage applications plummet to their lowest point in nearly three decades.

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