Data, analysis and insight into the economy and commercial real estate market by Dr. Peter Linneman:
Highlights:
The USA is and will be flooded with capital. Capital needs a home and will find it through the funding of citizen's pocket books from government stimulus checks which have then been spent on goods and services. Further, savings and capital sitting on the sidelines for two years will seek out asset purchases thus increasing values in the long run.
Sources of Capital:
American Families Plan to cover US social, educational and economic challenges: $1.8T.
Infrastructure proposal: $2.2T.
Passage of March 2021 American Rescue Plan: $1.9T.
The administration will aid in payment of this spending through increased capital gains tax, income taxes, the elimination of step up basis on death, a revamp of the tax treatment of carried interest and limited use of 1031 exchanges.
Economic growth:
As more citizens become vaccinated and the economy opens, people will spend generously. Bank deposits rose 22% in 2020 due to savings and government stimulus checks. Banks are performing well and have large capital cushions so will be ready to lend.
While the current Delta variant has cooled the economy, we saw the potential for growth last spring. It is a harbinger for the future. Restaurants added 830K jobs from December 2020 - May 2021. Air travel was up to 72% of 2019 levels over Memorial Day weekend and large investment banks are requiring vaccine and testing requirements to expedite a return to the office in the fall.
GDP is improving. While 2020 was negative, Q2 2021 increased at an annual rate of 6.6%. We are moving forward.
Housing:
As of May 2021, multifamily housing starts stood at 465,000, down from 588,000 in January 2020. Current production of 360,000 units/year results in a slight decline in the long run production shortfall. The cumulative 18 year shortfall is 755,000 today.
Single family housing starts were 1.1MM units in 2020 but there is still a shortage of 731,000 units as of Q1 2021.
Home builders have focused on larger homes while failing to meet the demand for smaller, starter homes. In short, housing supply is down. This will lead to increased rents for existing supply in the long term.
Unemployment:
Markets of note. On a percentage basis, the MSA’s that recovered the most jobs lost to Covid through April 2021 were: Salt Lake City, Jacksonville, Raleigh, Austin and Tampa. These are tech job centric cities and or have a government focused job base.
A Good Time for Asset Owners:
As the massive amount of capital enters the USA economy through 2023, the banking system will lend primarily to larger asset buyers. These buyers will transact with other asset buyers, further compressing cap rates and increasing values. Prices are to be inflated. It is time to buy before this trend.
Short term interest rates are anticipated to be near zero for the next 5 years.
Long term rates will be held low to accommodate increased federal spending. Sustained long term rates should create decent spreads with capitalization rates in the short-term thus generating positive NOI leverage and cash on cash returns for investors.
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