|One can start to see the light at the end of the tunnel! The vaccine rollout is underway, with approximately 118 million people receiving at least one dose of a Covid-19 vaccine, and about 72.4 million have been fully vaccinated in the United States. A massive $1.9 trillion stimulus package, called the American Rescue Plan Act, was signed into law by Congress, making it the second-largest package passed by Congress. Economists have raised their growth predictions for 2021 gross domestic product (GDP) to 4.3% – 5% on average, even going as high as 8.1%, by Morgan Stanley, which would be the largest growth since 1950.|
|A look ahead:|
|The Job Market|
The job market continues to improve as hiring surged in February with 379,000 jobs created as economic activity picked up in the leisure and hospitality sector, followed by the March report with a whopping 916,000 jobs and a 6.2% unemployment rate. By all means, it was a strong enough number to signal a shift in momentum for the jobs market. Now, the April report will arguably be the major focus on the economic front, outside of GDP, but its significance has been amplified by the pandemic, particularly as market participants seek more evidence on the magnitude of the rebound a year into one of the worst crises in a century.
Federal Reserve officials have been watching the jobs numbers closely, not only for overall growth in payrolls and a drop in the unemployment rate, but also a wide range of indicators like income, gender, and racial lines, within the employment figures. In the last Fed meeting, Chairman Jerome Powel reiterated the central bank’s stance, saying he doesn’t foresee the U.S. economy hitting the central bank’s goals anytime this year. It is clear, the FED is willing to risk higher than expected inflation for full employment and a full economic recovery.
|Government stimulus package|
Many economists have voiced their concerns on the size of the stimulus package of $1.9 trillion, and further talks of additional spending from the Biden administration on infrastructure and healthcare. Former top economic adviser to President Obama, Larry Summers, criticized the spending plan as a political stunt rather than an economic requirement and could lead to an inflationary disaster. His thoughts are that a reopened economy could rev out of control and see a surge in demand, overwhelming producers and sending prices soaring and at that point, the Fed would try to prevent the inflationary spike by abruptly hiking interest rates, plunging the economy into a new recession. On the flip side, many have made the case that during the 2008 crisis, the Obama administration did too little with regards to stimulus, which led to a slow prolonged recovery.
Both, Chairman Jerome Powell and Treasury Secretary Janet Yellen both anticipate only a temporary burst in prices as the economy is likely to run a little hot for about a year, and then level off.
The yield on the 10-year Treasury note hit 1.77% in March, and 1.56% in April. The move in yields comes as President Biden prepares to announce the details of his infrastructure plan which is expected to include up to $3 trillion in spending across a number of sectors. That being said, it is important to note that the yield on the 10-year reached .50% bps last July, which was an all-time low, and even now, yields are relatively low by historical standards.
More importantly, as I mentioned earlier, economists have been increasing their economic forecast for 2021. That kind of growth, fueled by trillions of dollars will put upward pressure on inflation, and the counterbalance to higher inflation is higher interest rates. As of now, inflation seems to be under control with Core Inflation (which excludes food & energy), remaining near 1.3%, and as we’ve been told by the FED, the level of comfort will be closer to 2%.
|Source: Blackrock Investment Institute | February 2021.|
View complete graph here
|The housing market continues to outperform all asset classes. The strong demand among buyers for a limited supply of homes has driven prices among existing single-family homes up by 15% year over year. First-time buyers account for almost 33% of purchases in February and millennials are making their way into the traditional homeownership stage of life. There are two key factors driving prices up: Relatively low-interest rates and a limited amount of supply (inventory), driven by demand and the higher cost of construction. According to Marcus & Millichap, the rising costs and weather delays have pushed the percent of pre-sold homes that have not yet started construction to the highest level since 1973.|
The rental market should benefit from the higher prices and lack of supply as fewer households are able to qualify for a mortgage or outbid on offers, further delaying the transition out of the rental market. Vacancies nationwide are at 6.5% at the beginning of 2021 according to the latest CoStar report. Not a huge increase, but given the fact that several months ago, landlords were forced to freeze rents or even lower in order to avoid vacancies would be considered a significant shift.
These improvements have been seen across all markets including South Florida. Some of the hardest hit markets like San Francisco and New York are beginning to see a moderate move into the black. Also, the latest round of stimulus will have a positive effect with direct payments and employment benefit extensions.
|While the retail industry operated under cloudy skies, the growth of e-commerce has been undoubtedly the silver lining for the sector. According to Colliers, during the lockdowns, an estimated 61.8% of all retail businesses were closed, accounting for 4.9 billion square feet. Not surprisingly, the fact that consumers shifted to online shopping, most regional and local retailers could not adapt fast enough through e-commerce, forcing them to close down. The national retailers were better suited to meet their rent obligations. That being said, while rent collections have not returned to pre-pandemic levels, overall rent collection climbed to 85.7% by the end of the quarter and should continue to improve, as the new round of stimulus is geared towards individuals and businesses, boosting consumer confidence.|
On the other hand, Single-Tenant Net Lease properties have been resilient through the pandemic and continue into 2021. Historically, these assets outperform other investments during down cycles, particularly because the tenants in this space provide vital products and services and hold strong balance sheets. This was no surprise for this sector, according to Colliers, which recorded a record high in 2020 with 2,415 transactions.
|Office should continue to improve in the coming months as employees make their way back to the workplace and the employment picture continues to improve. An effective vaccine rollout will play a major role as employees will demand a safe work environment. The South Florida market is going through a significant change as businesses of all shapes and sizes, ranging from investment firms to tech start-ups have lined up to either expand or completely relocate to what many are calling the “Free State” or South Florida, particularly from places like New York and California. |
The shift has created an unexpected shift in the luxury markets for both single-family homes and condos. Two key factors making South Florida attractive are 1. Florida’s low corporate income tax and zero personal income tax and 2. The average cost of office space in Miami is $45 SF compared to $65 in places like New York City or San Francisco.
Companies that have already moved or are moving are: Starwood Capital Icahn Enterprises Blackstone GroupColony Capital Nucleus Research Palm Drive Capital ShiftPixy Inc. Payless ShoesGoldman Sachs GroupElliott Management Corp Citadel Balyasny Asset ManagementDivvy HomesMajor Food GroupOne thing is for sure, the Covid-19 pandemic has shown us that more work can be done remotely than ever before. Therefore, less of a need for costly offices in high tax cities with snowy winters.
|The industrial market has been driven by the rapid growth of e-commerce. While the pandemic accelerated this trend, we expect this growth to continue and become more permanent. Consumer behavior has created the need for enhanced online experiences in retail, and the growth of this sector will prompt more distribution centers with larger logistics operations.|
Two other sectors within the industrial landscape in high demand are data centers and cold-storage facilities. The acceleration of cloud space due to the extensive use of apps, online videos and social media platforms will further drive the demand for data centers. Cold storage benefited from the demand from grocers to maintain larger than normal levels of inventory in order to expedite home delivery and curbside pickup orders. In addition, vaccines will need storage over the next 12 months.
|Hotels & Entertainment|
|As vaccines steadily become available throughout the first half of 2021, households are expected to take trips with greater frequency. Moving into the second part of the year, more companies will return to having employees travel, as well as a return of professional sports and entertainment venues. This should provide a healthy bounce-back but we don’t expect pre-pandemic numbers in 2021.|
|Continued turbulence will be evident in the 2021 market with the changes of a new presidential administration and a global economy in recovery from one of the greatest economic shutdowns in history. It will continue to take a collective effort from local, state, and federal governments as well as the private sector in order to continue to navigate through the challenges brought by the Covid-19. Market fundamentals, abundant liquidity and low cost of capital will continue to find its way to residential and commercial real estate. |
Liquidity and the search for yield has found itself to states like Florida, Texas and Nevada. Institutional money and major companies are paying attention to what is happening specifically in the Sunshine State, thus moving a great amount of capital to invest, particularly in the logistics, real estate and tech sectors. This has been putting a lot of pressure for originators and real estate investors as it becomes more difficult to find good deals at attractive prices. These have been challenging times, but we are confident that the economic reactivation will be positive for all of us.
At Linkvest Capital we are always looking to network and work with great people in the real estate industry. We are truly dedicated to building long-term partnerships, so if you or a friend need a strategic financial partner for a real estate investment or project, contact us and join our Linkvest Network!
Linkvest Capital Team.
Senior Analyst & Commercial Director at LV Lending
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