The CRE market
finds its rhythm

Watch for high notes from all the major property sectors, especially industrial, multi-housing, office and retail

March 10, 2021
>> Quick takes:
  • Economic outlook – same keys
  • Others are now singing our positive tune
  • Labor market beats expectations
  • Fed holding monetary policy at same tempo
  • CRE market starting to find its rhythm 

Businesses are largely hiring in expectation of the improving outlook. They see a declining pandemic, improving vaccination trend, more cash in consumers accounts and even the return of warmer weather.

Everybody ready?

Since the beginning of this crisis, we consistently anticipated a stronger performance from the economy than consensus. We did not downplay the severity of the crisis, but we also did not believe that the more dire forecasts would come to fruition. Lately, it feels as if the rest of the world is coming around to that point of view. Both economic forecasters and participants in the economy are adjusting course apparently, seeing better times ahead.

The song remains the same

Our positive view consistently hinged on two key factors, both of which continue to improve over time. First, we have repeatedly emphasized that the economy will not fully recover until we move past the pandemic. And vaccination provides the only expeditious path past the pandemic. Week by week, the vaccination trend continues to improve: new records for doses per day of 2.9 million reached on March 6th and for the average daily rate of doses of 2.2 million set on March 7th. Even better, this trend should continue to improve, much as we anticipated. The approval of the one-dose, Johnson-and-Johnson vaccine coupled with the current administration’s advanced timeline for obtaining vaccines for all adults (now moved up to May, two months ahead of the previous timeline) reinforce our base-case view that the U.S. should largely move past the pandemic by mid-year. Scientists increasingly believe that the virus will not get completely eradicated and remain in some from (likely endemic, like influenza) but most believe that phase will require less-severe control measures. Consequently, that should hold less disruptive economic consequences, reaffirming our view that growth should accelerate in the latter half of the year.

The outlook for the other key factor, fiscal support, also improved recently. The Senate passed its version of a $1.9 trillion stimulus package that the House will almost certainly pass and that the president will almost certainly sign into law. The package contains key provisions that will support the economy including: stimulus checks for households, a boost to and extension of unemployment assistance, aid to states and municipalities, support for small businesses, healthcare and education and assistance, and funds for vaccines, testing and hospital assistance. That amount comes in closer to the assumption embedded in our upside case, not our base case.

In tune

For us, the implications are clear. The recent developments, especially the fiscal policy developments, are pushing our outlook up. While a full accounting is beyond the scope of our weekly, our base case now sees growth around 6%. But to our original point, it appears as if others are coming around to this view. The consensus forecast for the economy continues to improve over time, at a relatively rapid pace, moving closer to our perspective. But it also appears as if organizations also feel more optimistic about the outlook. The employment situation for February surprised to the upside with net job growth significantly exceeding expectations. Much of this growth occurred in accommodation and food services (especially food services and drinking places). While both the pandemic and the economy improved in February, this gain appears to be more anticipatory than based on current need. Businesses are largely hiring in expectation of the improving outlook. They see a declining pandemic, improving vaccination trend, more cash in consumers accounts and even the return of warmer weather. The labor market still has a long way to go to fully recover. And cynics will surely find fault with the February data (for example it appears that most of the gains went to teenagers). But we welcome the implications of an improving labor market and forecast a strong labor recovery ahead.

February employment change, select categories

CRE is starting to sing a happier tune in 2021, even if it hits a sour note or two along the way.


|  What else happened last week  |

Fed Chair Powell reaffirmed the Fed’s loose stance on monetary policy for the foreseeable future. He reiterated the Fed’s belief in more transitory and relatively benign inflation, particularly noting continued slack in the labor market. While long rates continued to move up last week, short rates continued to hold steady, a sign that the Fed maintains its credibility. The yield curve has steepened as the outlook improved, exactly the way it should. The ISM indexes painted a bit of a mixed picture. The manufacturing index for February increased with activity improving, helping to alleviate fears about more permanent supply disruption. Meanwhile the non-manufacturing index decreased slightly. Both remain above 50 and taken together they signal an expanding economy.

|  What we are watching this week  |

Inflation will dominate the economic headlines this week. The consumer price index (CPI) for February should show increases in both the core and headline series, but the year-over-year readings should remain at muted levels. We expect a more noteworthy increase in the headline producer price index (PPI) for February. The year-over-year change should jump due to base effects (essentially low prices last year), but that appears more transitory than permanent.

|  What it means for CRE  |

Much like the overall economy, we believe that commercial real estate (CRE) should outperform the dourest expectations. We recognize the challenges still to come, but an economy that rebounded rapidly and appears headed for supernormal growth should help to assuage many of the worst fears about the asset class. We continue to believe that the downturn in CRE should fall roughly in line with previous downturns. All major property types can point to favorable developments. Industrial continues to benefit from the acceleration in ecommerce even if it cannot sustain the torrid momentum from 2020. Multi-housing continues to benefit from favorable demand/supply dynamics, even through a pandemic, and should benefit from a rebounding economy. Retail is eagerly awaiting the return of consumers and the roughly $1.6 trillion in dry powder they are sitting on, an amount sure to grow with another round of fiscal support. And office should benefit from the continued outperformance of the office-using segment of the labor market, especially as the overall economy grows. CRE is starting to sing a happier tune in 2021, even if it hits a sour note or two along the way.

|  Thought of the week  |

Women hold 30 CEO positions at S&P 500 companies, representing just 6% of jobs at that level.