Rates of change

Commercial real estate continues to show encouraging signs of recovery including increased interest in the office sector

April 27, 2021
>> Quick takes:
  • Robust growth likely in 1Q GDP
  • Fed will not change policy this week
  • Greater clarity on taxes forthcoming
  • Vaccination slowing, but remains elevated
  • CRE tentatively showing signs of stabilization

Rates of various types will dominate the economic landscape this week. Here we highlight four of them. First, the Fed meets this week to discuss monetary policy, including its current stance on interest rates. We do not expect much movement out of the Fed. They should keep the current policy firmly in place. But we will parse its statement and Chair Powell’s press conference for any details that might hint at changes to policy in the near term. The Fed is almost certainly waiting for better clarity on the direction of the economy – while all signs are pointing to a great year, it has increasingly signaled that policy moves will stem from actual and not anticipated changes in economic activity.

That brings us to the second key rate for this week: preliminary reading on first quarter GDP growth. The Fed, and the rest of the world, will pay close attention to this reading. Almost everyone expects strong growth, the question is, how strong? We are already anticipating robust growth for 2021 with our base case nearing 7%. As the economy more fully reopens amidst widespread vaccination, the middle quarters of the year should generate stellar economic results. But if the reading for the first quarter comes in at the high end of or above expectations, before widespread vaccination and reopening, that could imply growth unseen for decades. To put that in context, economic growth in the U.S. last reached at least 7% in 1984 and 8% in 1951. Moreover, it would demonstrate that the combination of vaccination enabling reopening, coupled with supportive monetary and fiscal policy, presents a potent remedy for what ails the economy. 

“As the economy more fully reopens amidst widespread vaccination, the middle quarters of the year should generate stellar economic results.”

The administration will reveal more information on the third key rate (more correctly rates) on taxation when the president addresses Congress this week. We have intentionally refrained from discussing the tax portion of fiscal policy too much because we lacked enough detail to discuss it adequately. Hopefully, the administration should provide us with greater clarity this week. Changes to both tax policy and spending policy could hold important implications for the economy, but we need to see the finer details before commenting. Thus far, fiscal policy measures have clearly boosted economic growth, at least in the short run. The finer details this week will help us to refine our outlook for both 2021 and the medium term, even though we remain positive toward both.

The last important rate, vaccination, also holds important implications for the economy. As we have previously discussed, vaccination in the U.S. is progressing well. The U.S. consistently ranks among the top nations by absolute number of vaccinations, percentage of the population given at least one dose, and percentage of the population fully vaccinated. Among developed nations, the U.S. along with the U.K. truly stand apart. But over the last couple of weeks the rate of vaccination declined even though a significant percentage of the adult population remains unvaccinated. The average daily rate stands at about 2.8 million doses, but that declined from a high of roughly 3.4 million set on April 13th. We will leave it to the health experts and epidemiologists to speculate as to why this has occurred. We would simply note that continued vaccination efforts will support further economic reopening and enable the supernormal growth that we are projecting. 

Vaccination pace still elevated, but slowing


|  What happened last week  |

Initial jobless claims remained elevated, but continued their downward trend, reflecting continued healing and reopening of the economy. New home sales in March leapt after a cool February, with the arrival of spring and warmer weather, reaching their fastest pace since August 2006. Meanwhile existing home sales for March came in below expectations, retrained by both limited inventory for sale and historically high prices. We still expect housing to have a strong 2021, but lack of inventory relative to demographically driven demand remains the key issue for the housing market. By one study’s estimate, the U.S. housing market remains net short by 2.8 million housing units, roughly equivalent to the entire housing inventory in the Commonwealth of Virginia.

|  What else we are watching this week  |

Consumer confidence and sentiment for April should both show continued improvement, reflecting the broader economic landscape. Durable goods orders for March should grow, but at a tepid pace as they recover from a February dip. Personal income and personal spending both likely surged in March, boosted by the most recent round of fiscal stimulus.

|  What it means for CRE  |

Commercial real estate (CRE) held up relatively well through the first quarter. While that does not discount some of the issues the sector is facing, we continue to see encouraging signs of recovery. Surging growth in the middle of this year should provide further support. We still anticipate that most major property types already have or will soon stabilize. Even office, which contains unique uncertainties due to the pandemic, has already seen interest in space and property tours increasing. CRE remains on the road to recovery but signs of progress abound.

|  Thought of the week  |

Shipments of physical audio albums as measured by CDs peaked in 2000 and by 2019 declined by roughly 95%.