Infrastructure
Fundamentals
It’s difficult to overstate the importance of infrastructure to commercial real estate
>> Quick takes:
- Cautious optimism for infrastructure plan
- Consumer data jittery, but recovering
- Inflation still not an impediment to growth
- Labor market set for another solid month
- CRE a cheerleader for infrastructure improvement
“… infrastructure investment remains vitally important to the long-term health of the economy…”
Promises, Promises
We have likely reached the “Fool me once, shame on you. Fool me twice, shame on me” stage of infrastructure investment in the U.S. Last week a bipartisan group of senators reached a tentative agreement with the administration on an infrastructure investment plan. On one level, this just seems like the next stretch of the same road to nowhere – lots of agreement about the importance of infrastructure per se, but little agreement on anything else. On another level, this seems like progress – an agreement between both parties and an administration to fund meaningful, if incomplete, infrastructure investment. Yet, we remain only cautiously optimistic until a bill is signed into law. Frequent readers of our weekly know that we diligently avoid politics in favor of policy. We are not stepping into the political fray here. We simply note that on the policy front, infrastructure investment remains vitally important to the long-term health of the economy, but we remain skeptical because politics can get in the way of sound economic policy.
Good Vibrations
Consumer data from last week showed households coming down from the most recent round of government support but also trending generally positive. Nominal personal spending trended flat between April and May while real personal spending declined during the same period. Spending received a boost from the most recent round of fiscal stimulus in March, but that impact waned in April before fading out in May. Nonetheless, the outlook for consumers remains positive with consumer sentiment rebounding in June after a pullback in May, supported by continued reopening of the economy and an incredibly tight market that largely favors workers over firms.
Consumer Sentiment still recovering
Meanwhile, both the headline and core personal consumption expenditures (PCE) indexes showed prices rising in line with estimates, and at rates that will likely provide the Fed with evidence that inflation is transitory and not more durable. Prices rising at an elevated but not excessive rate should not prevent consumers from continuing to spend money over the next quarter, further boosting the economy.
A Sort of Homecoming
Both new and existing home sales declined in May, with existing sales coming in notably below expectations. The causes of stalling momentum in the sales market remain consistent and related – low inventory for sale (especially at the lower end) and high prices. These factors have clearly overwhelmed low mortgage rates in driving the market. The outlook for both segments of the housing market appears tepid for the balance of the year because the main factors holding the housing market back remain intractable without easy remedies.
| What we are watching this week |
The employment situation release for June dominates the economic calendar this week. The labor market should produce another robust employment gain, well into the hundreds of thousands. Both the unemployment rate and the participation rate should prove stable, but risks at this point clearly lie on the upside so we would not be surprised to see slight improvement in either. We anticipate another robust showing from hourly earnings, driving the year-over-year wage change further upward as employers continue to increase wages to compete for scarce qualified labor across industries and skills. The ISM Manufacturing Index should hold well into expansionary territory, indicative of continued robust activity that should persist well into the latter stages of the year.
“Modern economies center on movement – of people, goods and information. CRE of various types benefit from this movement and the more efficient the better.”
| What it means for CRE |
For commercial real estate (CRE) the key issue from last week is the potential infrastructure spending plan. If legislation passes, it should not only boost the overall economy but should also provide a lift to CRE as well. Modern economies center on movement – of people, goods and information. CRE of various types benefit from this movement and the more efficient the better . Our creaking infrastructure presents a drag to both the economy and the CRE industry. Industrial and retail depend on the timely distribution of goods and services to consumer, either directly to their homes or indirectly to stores. Offices benefit from the efficient movement of people from home to work and back again, a dynamic that will take on increased importance during an era with a growing prevalence of work from home. Hotels benefit from business and leisure travels arriving quickly and safely at their destination, via all modes of transportation. Data centers facilitate the storage and movement of information. In short, it proves difficult to overstate the importance of infrastructure to CRE.
| Thought of the week |
In 2017, only 48% of adult Americans were deemed proficient in reading.
