The Weekly Briefing - July 6th, 2020

The Weekly Briefing – July 6th, 2020

In This Week’s Brief:

  • Consumer Spending on the Rise Across Bridge Target Markets
  • Some Green Shoots Emerge, But the Economic Recovery Is Slower than Hoped
  • U.S. Banks Face $47.6 Billion in CRE Losses in Worst-Case Scenario; Secular CMBS Delinquencies Rising

Consumer Spending on the Rise Across Bridge Target Markets

After experiencing acute downturns in late March, consumer spending continues to steadily accelerate in Bridge Target Markets. We are observing broad-based increases in activity as households across the country grew more confident in June about their economic situations. The upward trajectories in local consumption levels come as businesses reopen and begin bringing back furloughed and laid-off employees. Despite the positive trajectory of the past several weeks, spending in Bridge Target Markets remains below pre-pandemic levels and uneven. For example, consumer spending in Seattle is 17.9% below January levels, while Portland is down 14.0%. Conversely, Las Vegas has experienced a strong bounce back in consumption and is now only 8.9% below spending levels from earlier this year.

Seven-Day Moving Average of Percent Change in Consumer Spending Relative to Jan. 2020

Some Green Shoots Emerge, But the Economic Recovery Is Slower than Hoped

The ISM nonmanufacturing index registered a record increase of 11.7 percentage points to 57.1, suggesting the services sector shifted from contraction in May to expansion in June. This was the largest single-month increase in the series history. Overall, this is positive news, particularly as the ISM nonmanufacturing index measures activity for almost 90% of the U.S. economy. The monthly employment report released last week showed nonfarm payrolls increasing by 4.8 million people from mid-May through mid-June as the unemployment rate eased by 2.2 percentage points to 11.1% (though still undercounting due to BLS classification errors). Following a strong May job report of 2.5 million new jobs, which beat consensus of negative 7.5 million jobs, the two-month trend may create the necessary momentum to support broad-based growth. However, some data points indicate that the broader economic recovery has begun to lose some of early June’s inertia. The jobs report foreshadows longer-lasting turmoil in the labor market. The number of permanent job losses increased by 588,000 to 2.9 million and accounted for 21.4% of all layoffs compared to 13.0% one month prior. And since mid-June, alternative economic indicators suggest the recovery has slowed. Data provided by Homebase, which researchers at the St. Louis Federal Reserve Bank found is correlated with overall employment, show small-business employment and the share of open businesses have stalled. And JPMorgan Chase reports credit card spending declined at the end of June, which may be “too early to tell” whether this means consumer spending is slowing or if household reliance on debt is easing. A more robust recovery will require further improvements in household sentiment as consumption accounts for approximately two-thirds of U.S. economic activity. The most recent edition of the Household Pulse Survey, now in its 8th week, indicates a steady decline in the percent of households concerned about a potential loss of income from a high of 39% in the first week to 32% today.

U.S. Banks Face $47.6 Billion in CRE Losses in Worst-Case Scenario; Secular CMBS Delinquencies Rising

The Federal Reserve Board’s June stress tests indicate large U.S. banks could incur as much as $47.6 billion in CRE loan losses over the next two years in a worst-case economic scenario. This downside scenario assumed severe commercial and residential real estate price declines of 35% and 28% respectively and found that Wells Fargo, JPMorgan Chase, and Bank of America face the greatest CRE loan exposure. As noted below, over-exposure to the hotel and retail sectors carries the most visible risk. Given the broad uncertainty surrounding the trajectory of the coronavirus, the Board suspended bank share repurchases and capped dividend growth through the end of the year, but the summary report issued with the results of the stress tests emphasized all evaluated banks are sufficiently capitalized. On the CMBS side of the lending ledger, delinquency rates continue to grow in specific sectors, according to a Trepp analysis. The overall delinquency rate reached 10.3% in June, an increase of over 300 basis points compared to May. Fueling this increase, lodging and retail sectors delinquency rates stand at 24.3% and 18.1% respectively. In contrast, delinquency rates for multifamily, office, and industrial CMBS have experienced only a small uptick since the pandemic began and hover in the 1-4% range.

CMBS Delinquency Rates by Product Type

Disclosures and Disclaimers
This is a general analysis of the real estate market prepared by Bridge Investment Group LLC (“Bridge”) and is not related to any specific products or services of Bridge or any affiliate. Sources for statistics and other factual data included herein are maintained by Bridge Research. Such data has not been verified by Bridge and we can give no assurance that it is accurate or complete. Statements contained herein that are nonfactual constitute opinions of Bridge, which are subject to change. Financial projections contained herein are estimates only and are based on assumptions, including assumptions regarding future rent growth, the availability and cost of financing, changes in market capitalization rates, and various micro- and macro-economic trends. No assurance can be given that either the projections or the assumptions will prove to be accurate. Investment in real estate involves substantial risk of loss.
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