The United States is open for business. Economic activity is moving quickly in the right direction with business outlook strengthening, jobs and consumer confidence bouncing back in the second quarter. In the first quarter, the U.S. personal savings rate rose to 32.2 percent, its highest level since 1975, which was 17.3 percent, according to the U.S. Bureau of Economic Analysis. To put this into perspective, the U.S. savings rate has averaged between 6-8 percent over the last 10 years. As expected, the savings rate declined in May and June as business reopened, but it remained well above the average and suggests consumers have more room to spend. It will be interesting to see how the rest of the year plays out as the stimulus and unemployment benefits begin to fade.
In our last newsletter, we briefly touched on the topic of inflation and we highlighted some of the challenges that could arise from the amount of stimulus provided over the last twelve months. In the last quarter, the CPI index rose by .8 percent in April and .6 percent in May, bringing the 12-month average to 5 percent. This was the largest 12-month increase since a 5.4 percent increase for the period ending August 2008 (U.S. Bureau of Labor Statistics).
The increase in spending and the shortage in the labor markets for low-wage workers are driving the cost of goods and services higher. The cost of gas, food, construction materials, and home prices saw a significant increase over the second quarter and although still elevated, we are beginning to see those increases begin to level off. Lumber is a perfect example as it peaked at $1,670 on May 7th and since has tumbled for 9 straight weeks to $689 per thousand board feet.
Source: U.S Bureau of Labor Statistics
|The recent surge in inflation has created a divided FED according to the minutes of the last FOMC meeting on June 15-16, as they left the federal funds rate target unchanged. Various participants felt the economy is showing signs of recovery, allowing for the reduction of the central bank’s asset purchase or at least begin discussions. Others felt it was too early and cautioned that reopening the economy after a pandemic left an unusual level of uncertainty that required a patient approach to any policy change. That being said, the tone definitely changed in the last meeting going towards a post-pandemic view of the economy, dropping the virus talk, and beginning the discussions of interest rate projections showing borrowing cost higher as soon as 2023. |
One thing is for sure, the FED has indicated that it planned to maintain the support until further progress is made in recovering from last year’s recession. A key component of that progress will be reaching maximum employment and inflation targets.
|The Labor Market|
|As the economy reopens, the process of matching laid-off workers to jobs is proving to be slow and complicated. The quarter ended with a strong June report of 850,000 jobs after having below average gains in April with 266,000 and May with 559,000. Many businesses say they are struggling to find workers, a shortage that some employers and lawmakers from both sides of the aisle blame on the federal unemployment benefits, which they say discourage people from returning to work. Most economists disagree, but what’s clear is that some workers, particularly those who earn low wages, are being more selective about where they work. |
This helps explain why wages are rising even when the unemployment rate hit 5.9 percent in June, which is well above pre-pandemic levels of 3.5 percent. In theory, the relatively high jobless rate suggests an excess of labor supply which should hold wages down. This can create inflation pressures forcing Federal Reserve policymakers to pull back on low interest rate policies meant to support growth. On the other hand, in the long run, the slow process could end up benefiting workers and the economy with jobs they prefer doing along with better pay.
Many economists are comparing today’s job phenomenon to that of the 2008-2009 financial crisis. At the time, many believed the economy was suffering from a skills mismatch for those that worked in construction, real estate and manufacturing and weren’t suited for jobs in sectors like education and healthcare which were rapidly expanding during that time. A similar scenario is happening today, where there is a high demand for jobs, but some are just not suited for them.
Source: Costar Big Book Economy State of the U.S. Economy | July 2021. View complete book here
|The housing market is soaring, particularly in South Florida. Single-family home sales and home values have increased between 18-20 percent according to Zillow. The story continues with new residents and businesses relocating from high-tax urban areas like New York which are driving demand, as well as low inventory and interest rate. |
This has both positive and negative impacts. Higher home prices may drive new home buyers out of reach. However, the rental market benefits from high prices, keeping first-time homebuyers renting for longer, which explains why rental growth and demand for rental property is so strong in South Florida and that is the main reason why we at Linkvest continue to invest in the development of high quality multi-family projects with our developer partners.
Multi-family in Miami has been incredibly hot, with low cap rates and very few properties coming to market. Although rents were affected by Covid 19 for most of 2020, by 2021 rents have recovered and vacancy rates are low, particularly in less expensive and older units. We at Linkvest, benefited from this trend as we sold in the last two months, two of the multifamily projects where we invested at caps close to 4.25%.
There has also been a growth in development focusing on rental buildings with 11,529 units currently under construction in 46 projects in Miami-Dade county. There are very few multifamily properties on the market for sale since investors find them to be a very safe investment.
Rents also have been increasing due to high demand and low volume of properties for sale in the market which have made it very difficult for households that do not have a large amount of savings. Single-family homes require low down payments but are at record high prices, and condos require higher down payments, particularly if the association does not have enough reserves, which makes renting the only option for many households in the market.
|The retail market was affected by the Coronavirus pandemic, which saw businesses either close or reinvents themselves with the usage of space. This, in combination with the construction of new retail spaces, has made retail rent go flat or grow under the inflation rate. Still, vacancy rates are low with a 4.1% for the whole industry, being the most affected neighborhood centers, general retail, and malls. |
Power centers and strip centers have shown to be stronger, usually focusing on tenants that offer services rather than goods and strong anchors, which were not affected or subject to closure during the pandemic and offer a better experience for customers with easy access to the shop or integrate their physical locations to their e-commerce strategy.
|As in many parts of the country, office space has been negatively affected by the pandemic, and even when the worst is over, many companies are reconsidering their needs for office space. Net absorption for office space is at negative 125 million sq ft with vacancy average rates of 12.4% and going as high as 16.1% for Class-A space.|
On top of the pandemic, the market will be affected with over 3 million new square footage currently under construction, usually, as part of mixed-use projects hitting the market in the coming months with no tenants looking to increase their footprint. Although there has been plenty of buzz about new companies moving to Miami, these companies do not have the number of employees to fill these spaces.
|Industrial in Miami is holding tight. Vacancy rates climbed due to a high volume of speculative space that has been under construction hitting the market for the logistics sector, but rents are still strong and showing a better performance than the national average. Cap rates have also gotten smaller with the market showing to be strong against the virus and even doing better than ever in an environment where more people look for goods and services online. The rate of construction is expected to slow down, but will not halt. |
While no one can say for sure what will happen with the real estate sector, most experts are confident that we’ll experience a market dip or a slowdown, but certainly not a crash.
|As the U.S. begins to reopen, we are confident that the economy will grow at a fast pace for the rest of 2021, and into 2022 given the aggressive measures taken by the Federal Reserve and the government. It will continue to take a collective effort from local, state, and federal governments as well as the private sector to continue to navigate through the challenges ahead of us. |
Market fundamentals, abundant liquidity and low cost of capital will continue to find their way to residential and commercial real estate, especially in South Florida.
As the year advances, we are seeing how the reactivation of the economy favors the real estate industry and therefore Linkvest Capital. Our three co-investment platforms for lending, acquisition of retail properties and development of multi-family projects and other mix-used projects have in recent months found interesting investment opportunities, which ratifies this premise.
We are confident that there will be many more opportunities and that together along with our co-investors, business partners, borrowers, business providers and team, we will continue growing and overcoming the challenges we encounter.
At Linkvest Capital, we analyze, structure, and manage alternative investments in which capital preservation and recurring cash flow generation are paramount.
Currently, we have three co-investment platforms to participate in the real estate market: bridge financing (LV Lending), acquisition of commercial properties (Linkvest Properties), and development of multi-family and mixed-used projects (LV Development).
Thank you for your trust in our team, for being part of our Linkvest Network and for building this great long-term partnership together.
If you would like to discuss a real estate project or a funding solution, simply reply to this email!
We look forward to working with you.
Linkvest Capital Team
Senior Analyst & Commercial Director at LV Lending
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