The Weekly Briefing - May 18th, 2020

The Weekly Briefing – May 18th, 2020

In This Week’s Brief

  • The Need for Additional Stimulus as ‘Green Shoots’ Are Appearing
  • Four-year University Closures in Fall 2020 Could Have Ripple Effects in Markets Dependent on Students
  • Lower Consumer Spending Pulls Inflation into Negative Territory; Housing Prices Unchanged
  • Multifamily Rent Payments Stable, but Softening Rent Levels Appearing

The Need for Additional Stimulus as 'Green Shoots' Are Appearing:

Federal Reserve Chairman Powell’s call last week for more fiscal stimulus to prop up the economy constituted an unusual appeal to elected officials and underscored the risks facing the U.S. economy. Fed officials traditionally do not comment on government policy, but Powell warned additional aid may be needed to “avoid long-term economic damage” as the recovery may be slower than hoped.
  • Since the onset of the pandemic, Congress has allocated a total of $2.9 trillion to fiscal stimulus measures.
  • Congress and the Administration, however, are far from agreeing to terms on another round of relief. The House of Representatives narrowly passed a $3 trillion package on Friday, which was not a result of bipartisan negotiations. The bill has little chance of moving through Congress as Senate Majority Leader McConnell described the measure as “an unserious product from an unserious majority.”
Despite the sober tone of Powell’s comments, some sectors of the economy are beginning to show some signs of revival.
  • The Housing Market Index increased seven points to 37 during May, after suffering a record drop in April, as homebuilders became cautiously more optimistic about single-family home construction. And the latest data from John Burns Real Estate Consulting shows weekly new home sales improving for two consecutive weeks.
The Las Vegas economy has been hard hit, and the trajectory of recovery there remains unclear. However, last week the Nevada Gaming Commission issued guidelines for reopening casinos. Casinos will be limited to 50% capacity with conventions limited to 250 people. Several casinos and resorts are actively seeking approval to reopen with new restrictions in place with the goal of limiting the chances of spreading infection.

Four-year University Closures in Fall 2020 Could Have Ripple Effects in Markets Dependent on Students:

Whether students return to college and university campuses next fall has implications not only for local economies, but potentially for commercial multifamily and student housing demand. The California State University (CSU) system announced last week that Fall 2020 classes will be held online, which signals a potential inflection point for markets fueled by the student economy. With 482,000 students, CSU is the largest four-year educational system in the country, and its decision has attracted nationwide notice that could lead smaller higher-education institutions to follow suit.
  • The implications for multifamily rentals would be especially pronounced in smaller college towns. In Ames, IA, for example, students account for 25.6% of the metropolitan population.
  • The economies of many larger markets, in contrast, are more diversified, so the impact of online classes on real estate markets would be more localized. In Austin, TX—home to the University of Texas—students make up 4.4% of the metro population with large numbers of students living in the Downtown/University submarket. There are 164,000 students in the Phoenix, AZ metro, but they account for only 3.4% of the population with the greatest concentration of students in Tempe.

Metropolitan Areas with the Largest Student Share of Population

Lower Consumer Spending Pulls Inflation into Negative Territory; Housing Prices Unchanged:

Core inflation (all items less food and energy) fell 0.4% during April. While this is unsurprising, it is important to recognize the extent to which households pulled back on discretionary spending because of lost wages and stay-at-home orders. The figure marks the largest decline in at least two decades and underscores the depth to which the pandemic has reshaped household finances. Prices for housing held steady at 0.0% month-on-month, while prices for airline fare, motor vehicle insurance, and clothing registered the largest decreases. Energy prices contributed to a 0.8% decrease overall in the CPI-U. Gasoline of all types registered a 20.6% drop in prices month-over-month and a 32.0% drop year-over-year. With more states easing social distancing and stay at home policies, we expect demand to return and bring stability to this part of the market.  

Seasonally Adjusted, Month-on-Month Change in CPI-U by Expenditure Category

Multifamily Rent Payments Stable, but Softening Rent Levels Appearing:

The multifamily market continues to experience resilience several weeks after stay-at-home orders were enacted in most major metropolitan areas. NMHC reports that 80.2% of renters had made a partial or full May rent payment before the 6th, a slight improvement over April 2020 and only 150 bps below May 2019. An additional 7.5% of renter households paid rent between May 7th and 13th.
  • Yardi, a contributor to the NMHC rent tracker, reports that unit rents fell 0.5% to $1,465 during the month of April, a larger decline than any during the GFC and essentially bringing rents to August 2019 levels.
MRI separately indicated that rents declined 2% during April and concession volume increased 53% for the one million units that it tracks. At the same time, however, renewal rates and the share of 12-month leases were slightly up, while vacancy rates have dropped 15%.

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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