The Weekly Briefing - May 26th, 2020

The Weekly Briefing – May 26th, 2020

In This Week’s Brief

  • Consumer Confidence Stabilizing
  • Commercial Real Estate Transaction Activity Grinds to a Halt
  • Pace of Residential Construction Dropping and Existing Home Sales Slowing
  • Pandemic Could Induce More People, Including Millennials, to Leave the City

Consumer Confidence Stabilizing:

The COVID-19 crisis revealed the strong relationship between the health of the U.S. economy and the active participation of the American consumer. The Conference Board reports their Consumer Confidence Index rose to 86.6 in May from April’s 85.7 revised level. Lynn Franco, Senior Director of Economic Indicators at The Conference Board, says “following two months of rapid decline, the free-fall in Confidence stopped in May.” (link to The Conference Board press release, #6172) Breaking down these numbers reported by Moody’s Analytics, there are some notable observations.
  • Expectations for the future are rising, from 94.3 in April to 96.9 in May. Current levels are above last October (94.5) but not quite where they were in February (108.1).
  • Views of present conditions are worse for May (71.1) than in April (73.0). We have not seen the optimism from February (132.6) since the late 1990s.
  • The labor market differential, which measures the difference between saying jobs are readily available versus difficult to get, was negative the past two months. May (-10.4) was an improvement over April (-15.7), and we are not seeing depths similar to the GFC when November 2009 registered at -46.1.
The labor market differential, which measures the difference between saying jobs are readily available versus difficult to get, was negative the past two months. May (-10.4) was an improvement over April (-15.7), and we are not seeing depths similar to the GFC when November 2009 registered at -46.1.

Commercial Real Estate Transaction Activity Grinds to a Halt:

Two months since the onset of the coronavirus crisis, commercial real estate transaction activity has reached a standstill, complicating plans across the industry to deploy capital and harvest returns. Real Capital Analytics (RCA) reports that total transaction volume in April totaled $11.0 billion—a 71% decline compared to a year ago—and every property type experienced a slowdown. Many investors have undoubtedly pulled back because of a combination of factors including the heightened uncertainty about the future trajectory of rents and occupancy levels. RCA reports that the number of unique active buyers plummeted during April and that the share of collapsed deals rose sharply. Government-imposed restrictions have also likely contributed to the halt in activity as stay-at-home orders and social distancing complicated efforts to conduct due diligence. Looking ahead, market participants can expect increased difficulty and uncertainty when pricing assets as the lack of transaction activity will limit the number of comparable sales.

April Commercial Real Estate Transaction Volume by Property Type

Pace of Residential Construction Dropping and Existing Home Sales Slowing:

Despite most state and local governments deeming construction as an essential business, residential construction activity decelerated in April, which if continued could aggravate housing shortages and undermine single-family home affordability. The Census Bureau reports that privately owned housing starts dropped 30.2% during April compared to the month prior and that residential building permits fell 20.8%. However, demand for new homes remains robust as the Census Bureau’s preliminary estimates of 623,000 new homes sold in April is 6.2% lower than one year ago.
  • The Midwest has been particularly attractive to new homebuyers with a 26.5% increase year-over-year. However, we see large year-over-year decreases in the Northeast (down 26.5%) and the West (down 33.5%). These regional shifts are likely to explain the decrease in median new homes sales price from $326,900 in March to $309,900 in April.
The COVID-19 crisis and related restrictions have similarly disrupted both the supply and demand sides of the equation in the market for existing homes. Nationwide home sales declined 15.4% month-on-month during April, based on an analysis of data provided by Redfin, a national real estate brokerage.
  • Many would-be buyers have likely held back because of concerns about health and safety, job losses, and tighter credit standards.
  • At the same time, the number of new listings dropped 29.8% from March to April even though most metros are entering peak season as summer approaches.

Pandemic Could Induce More People, Including Millennials, to Leave the City:

The number of urban residents expressing interest in relocating to the suburbs has swelled in recent weeks, according to multiple media outlets. If confirmed, this would add to the ongoing net outflow of people from many major cities. The Brookings Institute conducted analysis two years ago identified shifting migration patterns in which suburbs began to grow more rapidly at the expense of core urban areas started as early as the middle of the last decade.
  • Many of the amenities that add to the appeal of the city are temporarily unavailable, including restaurants, entertainment venues, and cultural offerings.
  • In contrast, the advantages of the suburbs, such as more affordable living space and lower-density development, grow more appealing in a world of stay-at-home orders and social distancing.

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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