The Weekly Briefing - August 3rd, 2020

The Weekly Briefing – August 3rd, 2020:

In This Week’s Brief:

  • GDP Contracted 32.9% During Second Quarter, Largest Decrease on Record
  • Multifamily Construction Starts Collapsed in Q2 2020; Further Supply Constraints Expected
  • Office Space Available for Sublease on the Rise in Austin and the Bay Area

GDP Contracted 32.9% During Second Quarter, Largest Decrease on Record

The Bureau of Economic Analysis’ (BEA) advance estimates for the decline in U.S. economic activity in Q2 2020 resulted in a quarterly annualized GDP growth rate of negative 32.9%. The severity of the economic contraction far exceeds the largest decreases in records that date back several decades. Prior to this past quarter, the largest historic negative reading of the seasonally adjusted annual rate was -10.0% in Q1 1958. While the scale of the contraction was not unexpected, the figure underscores the depth and rapidity of the economy’s decline when substantial portions of local economies are shut down as was with this spring’s effort to contain the pandemic. It should be noted, however, that the headline figure reported by the BEA assumes the pace of decline continues at the same pace and compounds for the next three quarters. This means the annualized figure translates into a Q1 2020 to Q2 2020 decrease of 9.5% in GDP measured in chained (2012) U.S. dollars. This nonannualized figure paints a more accurate picture of the current economic situation—particularly as consensus views expect a sharp Q3 rebound. However, this significant decline in GDP will have a meaningful impact for other headline figures, such as the U.S. Debt to GDP ratio. Despite the widescale economic damage during the second quarter, the BEA reports that the personal saving rate more than doubled to 25.7% and that disposable income jumped 42.1%, while separate reports indicate consumer borrowing dropped sharply. These gains are likely driven by two factors: (1) expanded levels of government aid and (2) cutbacks on nonessential expenditures as consumers focused spending on basic needs and essential services while business and social distancing restrictions were in place. Looking ahead, the increased savings rate and disposal income levels could translate to significant pent-up demand. As suggested yesterday by Minnesota Federal Reserve Bank President Neel Kashkari, the surges in savings and disposable income are likely to add a crucial boost to the recovery once consumers become comfortable again going to restaurants, the movies, or on vacation. Mr. Kashkari also posits that the spike in savings opens the door for Congress to extend financial relief because ample capital circulating in the financial system would make foreign borrowing unnecessary. Congress and the Administration, however, continue to negotiate the terms of another stimulus package despite key benefits having already expired at the end of last week.

Nonannualized Quarterly GDP Growth: 2007 to Present

Multifamily Construction Starts Collapsed in Q2 2020; Further Supply Constraints Expected

Multifamily starts across the U.S. plummeted 60.7% during the second quarter relative to the quarterly average since 2015 even though construction was considered an essential business in most corners of the country. Many developers and investors grew hesitant to make long-term financial commitments amid a rapidly evolving pandemic and recession, while those still interested in starting projects may have found it more difficult to finalize permits and financing. The drop off in multifamily starts will mean fewer deliveries during late 2021 and early 2022, and owners of existing assets as well as newly developed assets will face less competitive market conditions and upward pressure on pricing. Housing affordability is likely to decrease as the decline in construction activity will amplify preexisting supply constraints that predated the coronavirus outbreak, especially in markets with already high housing costs. At the metro level, Orange County, Jacksonville, Las Vegas, and Riverside/San Bernardino saw no new construction starts during the second quarter, but the downturn was felt in markets across the country and was not limited to a particular region. Highlighted in the figure below are large markets experiencing significant reductions in new starts.

Markets with the Largest Percentage Declines in Multifamily Starts

Office Space Available for Sublease on the Rise in Austin and the Bay Area

While the amount of office space available for sublease has increased in most major markets across the U.S. since the start of the year, Austin and the Bay Area are easily experiencing the most substantial surges. Both markets have seen available sublease space jump by more than 150 bps when measured as a share of total inventory, compared to a national increase of only 40 bps. According to data from the CoStar Group, available sublease space in Austin and the Bay Area now accounts for 3.3% and 4.2% respectively of each market. In addition to Austin and the Bay Area, a handful of other tech-heavy markets, such as Denver, Boston, and Seattle, have also seen available sublease space climb more rapidly relative to most other major markets. Some brokers have suggested that tech firms are primarily responsible for the increase in available sublease space as the difficult economic environment has slowed these companies’ expansion plans. The same brokers report that a switch to remote working has been a less significant factor so far. Regardless of the ultimate cause, the increase in available sublease space could signal coming market distress in select markets. At the same time, as shown in the figure below there are several high-growth office markets that are showing little change. As a metric, the availability of sublease space is one of several market indicators measuring changes in market dynamics and provide insights in the near-term as conventional (and reliable) indicators have some lag due to the sector’s typical long-term lease periods. As such, available sublease space should continue to be monitored moving forward as the economic recovery continues.

Change in Office Sublease Availability Rate Since End-2019 for Properties With 75,000+ SF

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