The Weekly Briefing - June 15th, 2020

Economic Recovery in Real Time Following up on the unexpectedly positive May jobs report, indicators continue to show strengthening economic activity heading into the summer months. Researchers at the St. Louis Federal Reserve Bank report employment levels continued to rise steadily in early June based on their analysis of data provided by Homebase, a scheduling and time-tracking tool used by small businesses and hourly employees. Consumer sentiment accordingly improved in early June as the University of Michigan index bounced back from the prior month’s record fall, improving more than six points to 78.9. The chief economist for the survey noted “renewed gains in employment” factored prominently in consumers’ improved perspectives as did outlooks for personal finances. Echoing this, a recent report by Discover confirms that at least some consumers have regained their footing as most participants in its forbearance program have resumed regular payments after only one month. At the same time, Discover noted more broad-based increases in credit card spending in late May.

Federal Reserve and CBO Expect Similar Levels of Economic Contraction Notwithstanding the economic gains noted above, recent projections from the Federal Reserve and Congressional Budget Office (CBO) underscore the severity of the current crisis and expectations for a longer road to pre-pandemic economic levels. The Fed and CBO’s expectations for this year are similar with projected end of year YoY GDP declines of 6.5% and 5.6%, respectively. Both expect a strong economic bounce back in 2021 with YoY GDP change between 4.2% (CBO) to 5.0% (Fed). The Fed is slightly more optimistic regarding unemployment with expectations that the unemployment rate will fall from current levels to 9.3% by year-end, compared to the CBO’s figure of 11.5%. By Q4 2021, the Fed’s median projection for unemployment is 5.5%. The Federal Reserve and CBO also agree that recent monetary and fiscal policy interventions have staved off worst-case scenarios and should help the U.S. economy avoid permanent long-term damage. The Paycheck Protection Program (PPP) appears to have played a particularly important role in supporting employment as a National Federation of Independent Businesses survey found that two-thirds of PPP recipients say the loan is very helpful in supporting their business. However, PPP funding has made greater inroads in some states than others. Hard-hit New York and New Jersey have received some of the highest levels of support relative to the size of the states’ labor forces. In contrast, Nevada has received some of the least funding of any state despite substantial labor market turmoil. PPP Funds Distributed Per Job

Multifamily Rent Payments Steady, but Occupancy and Rents Showing Signs of Disruption Multifamily rent payment trends continue to demonstrate resilience through the first week of June. NMHC’s rent payment tracker, which is based on collections for 11.5 million apartment units nationwide, shows 80.8% of residents made a full or partial rent payment for June by the 6th of the month, a marginal improvement over May figures and only 80 basis points lower than a year prior. Multifamily occupancy and rent levels, on the other hand, are beginning to display signs of disruption in many markets. RealPage notes that nationwide occupancy rates have slipped 40 basis points since mid-March, although improved leasing levels in the latter part of May could provide a boost to June’s figures. Rents have also declined on a month-to-month basis in both April and May with coastal markets such as Boston, New York, and the Bay Area seeing some of the largest declines. On the other hand, Midwestern metros, where rent growth has been more muted in recent years, top the list of markets experiencing positive or stable rent trends so far. New Lease Rent Changes in May

RCA Analysis Identifies Widening Price Expectations Gap Between Buyers and Sellers As economic uncertainty has grown in recent weeks, the expectations of buyers and sellers of commercial real estate have diverged. This divergence has contributed to the sharp downturn in transaction activity, noted in earlier Weekly Briefings, and continues to place downward pressure on prices. The hard-hit retail sector has experienced the broadest disconnect, but the variance in expectations also extends to office, multifamily, and industrial. The growing gap is a product of buyer uncertainty about revenue, future performance, and a reluctance among owners so far to substantially discount prices. The interplay of these two dynamics is likely to determine the trajectory of price discovery in the coming months. But the degree to which this will occur depends on which players are more motivated to complete the transaction—buyers that have record levels of dry powder or sellers who may find it difficult to refinance and insure assets at favorable terms. Buyer-Seller Expectations Gap by Sector

Several U.S. States Heading Toward Severe Budget Crunches New research on the relationship between employment levels and state tax revenue predicts states will experience a 20% average decline in tax receipts because of the current economic crisis. The study, which is still under review, concluded that several Northeastern states, California, Georgia, and Nevada will experience some of the largest decreases in tax collections. Many states cannot incur debt because of state constitutional or statutory requirements, which means that without federal financial support many states may have to resort to basic service reductions and/or staff cuts to balance the budget. Such austerity measures would deepen the current economic malaise and inhibit a recovery, as occurred during the Great Recession. States Predicted to Experience the Largest Tax Revenue Declines

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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